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Full text of "Report to the Subcommittee on Excise Tax Technical and Administrative Problems"

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REPORT TO THE SUBCOMMITTEE 

ON 

EXCISE TAX TECHNICAL AND 
ADMINISTRATIVE PROBLEMS 

HOUSE COMMITTEE ON WAYS AND MEANS 



Prepared by the Staffs of the 

Joint Committee on Internal Revenue Taxation and 

Treasury Department 




UNITED STATES 
GOVERNMENT PRINTING OFFICE 
70820 WASHINGTON : 1956 



LETTER OF TRANSMITTAL 

January 9, 1956. 

Hon. AlME J. FORAND, 

Chairman, Subcommittee on Excise Tax Technical and 
Administrative Problems, 

Committee on Ways and Means, 

House oj Representatives, Washington, D. C. 
Dear Mr. Forand: There is transmitted herewith a joint report 
of the staffs of the Treasury (including the Internal Revenue Service) 
and the Joint Committee on Internal Revenue Taxation on excise tax 
technical and administrative problems. Mr. Riddell, professional staff 
member of the Committee on Ways and Means, has participated in 
these studies. 

Respectfully yours, 

Colin F. Stam, 

Chief oJ Staff, _ 
Joint Committee on Internal Revenue Taxation. 

Dan Throop Smith, 
Special Assistant to the Secretary of the Treasury in Charge of 
Tax Policy. 

m 



SUMMARY OF RECOMMENDATIONS 

I. Geneeal 

A. PULL AGREEMENT 

1. Warranties 

A readjustment in sales price giving rise to a credit or refund should 
not be made with respect to the expenses sustained by a taxpayer in 
fulfilling his warranty. 

Where the taxpayer makes a separate compulsory charge, the 
definition of sales price for purposes of the retailers and manufacturers 
taxes should be amended to include specifically compulsory charges 
for the warranty of the articles. 

It is believed that the report accompanying such legislation should 
indicate that it is declaratory of the intent of Congress as originally 
expressed in enacting section 6416 (b) (1) of the 1954 code and corre- 
sponding provisions of the 1939 code and prior laws. 

2. Cooperative advertising 

The status of cooperative advertising in relation to a manufacturers 
tax base should be clarified by a specific ruling of the Internal Revenue 
Service to provide substantially as follows: 

(1) Where a manufacturer's selling price to his customer contains 
an unsegregated advertising charge, it is a part of his tax base. 

(2) In the case where a manufacturer makes a separate charge to 
his distributor for advertising and the proceeds are kept in a separate 
account earmarked for advertising, the separate advertising charge is 
not a part of the tax base provided the charge is either listed on the 
sales invoice or billed separately; the contributions from distributors 
are set aside as a fund to be used for advertising for the benefit of 
these contributors; and the funds are so used or the unexpended 
portion is held in trust or refunded to the contributor upon his with- 
drawal from the program. 

(3) Where the manufacturer makes a contribution to the advertising 
account in the case of a separate fund, the amount of the manufac- 
turer's contribution may not be deducted in computing the taxable 
sale price. Subsequent allowances from such contributions to dis- 
tributors for expenditures by them or their dealers in advertising 
should be treated as readjustments of sale price under section 6416 
(b) (1) of the code. 

3. Sale of installment accounts 

Uncertainty as to congressional intent with respect to the tax to be 
paid upon the sale of installment accounts at less than face value 
should be resolved by statute. The rule now applied by the Service 
requiring payment of tax upon face value irrespective of the selling 
price with, however, payment of the tax on the selling price in bank- 
ruptcy and receivership cases is proposed as being a reasonable. one if 
the rule used for bankruptcy and receivership sales is extended to 
similar sales under any other legally distressed situation. 



2 EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 

4. Installment accounts under Louisiana law 

To make it clear that taxpayers in Louisiana are to have the privi- 
lege of deferring their tax payments under the installment type of 
contract which is recognized under Louisiana law, sections 4053 and 
4216 (c) should be appropriately amended. 

5. Consolidated returns 

Statutory authority should be given the Secretary of the Treasury 
or his delegate so that he may authorize by regulations (subject to such 
limitations and conditions as appear appropriate or administratively 
desirable) a person liable for the filing of returns of retailers taxes and 
the transportation of property tax designate his supplier or shipper to 
perform such acts as are required of him in connection with the filing 
of returns relating to such taxes. 

II. Manufacturers Excises 

A. FULL AGREEMENT 

1. Rebuilt automotive parts 

In regard to the reconditioning, rebuilding, and repairing of auto- 
motive parts, the Service will reexamine its latest published ruling on 
treatment of generators to evaluate its consistency with the present 
treatment accorded to the rebuilding of automobile engines. 

2. Electric direct-motor driven fans and air circulators 

Electric direct-motor driven fans and air circulators should be taxed 
only if they are of the household type. 

3. Definition of radio and television components 

The tax on television and radio components should be applied only 
to those components which are suitable for use on or in connection 
with entertainment type sets. 

B. AGREEMENT IN PRINCIPAL 

4. Leases 

The tax on articles leased instead of sold should be limited to the 
tax that would have been due had the article been sold, but only if 
some sales of the articles are made. 

III. Retailers Excises 

A. FULL AGREEMENT 

1. Semiprecious stones purchased by lapidarists 

The test of taxability of semiprecious stones should turn upon 
the finished state of the stone. They should be subject to tax only 
when cut or polished. 

2. "Basket clause" under luggage tax 

The "basket clause" in section 4031 should be removed and in 
lieu thereof a somewhat longer list of articles should be made subject 
to the tax. 



EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 3 

IV. Excises on Facilities and Services 

A. FULL AGREEMENT 

1 . Geographical scope of general admissions tax 

The law should definitely state that the admissions tax appHes 
only to events that take place in the United States. 

2. Exclusive use of cabaret premises 

The Internal Revenue Service is to issue new rulings under the 
cabaret tax to provide that where a private organization conducts an 
affair in a room customarily and regularly used as a cabaret and 
negotiates with the proprietor to provide the dinner and any other 
services desired but not for the entertainment, the cabaret tax will 
not apply if the private organization by independent negotiations 
provides its own entertainment and the entertainers are not regularly 
employed by the proprietor both prior to and after the affair in 
question. 

3. Collection of tax on amounts paid to concessionaires at cabarets 

The propiietor, owner, or lessee of a cabaret should be requhed to 
collect the cabaret tax due from concessionaires and include such 
amounts when making his monthly deposits and quarterly returns 
with other payments received by such proprietor for admission, 
refershments, service, or merchandise. 

4. Life memberships in social clubs 

The annual tax on life memberships should be equivalent to the 
tax on the annual dues and membership fees of the type of annual 
membership providing privileges most nearly like that of the life 
membership. 

5. Communication taxes 

It is agreed that a study should be made of the communications 
taxes to determine whether they should be revised substantially to 
conform to modern techniques and to remove any competitive prob- 
lems which may exist. 

V. Documentary Stamps 

A. FULL agreement 

1. Partnership treatment 

The so-called entity rule should be adopted for transfers of partner- 
ship interests in the case of the documentary stamp taxes. 

2. Payment of transfer taxes through national securities exchange by check 
The purchase of stamps by clearinghouses of national security 

exchanges should no longer be required and instead clearinghouses 
should be required to make daily payment by check to an authorized 
Government depository of the total amount of taxes shown on the 
broker-member's reports. 

3. Exemption certificates 

The statutory requirement for exemption certificates under the 
documentary stamp taxes should be liberalized. 



4 EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 

4- Return of stock or certiUcates of indebtedness deposited as collateral 
security 
The transfer tax should not apply to the return of stock or certifi- 
cates of indebtedness deposited as collateral security. 

5. Basing the stock issuance and transfer taxes on the actual value rather 

than par value 
The stock transfer and issuance taxes should be revised as follows: 

(1) The tax on the transfer of stock or stock rights would, in 
general, be 5 cents on each $100 or major fraction thereof of the 
actual value of each certificate (or of the share where no certificate 
is transferred). The minimum tax per certificate (or share where no 
certificate is transferred) however, would be 5 cents. The rate 
would be 5 cents per share in the case of transfers which do not 
involve a sale or exchange for value. 

(2) In the case of the stock issuance tax, the rate would be 10 
cents on each $100 or major fraction thereof of the actual value of 
each certificate (or of the shares where no certificate is issued). The 
minimum tax in any case would be 10 cents per certificate (or share 
if no certificate is issued). 

6. Definition of certificates of indebtedness 

The statute should specify that certain notes which are more in the 
nature of certificates of indebtedness than promissory notes should 
be subject to the documentary stamp tax as certificates of indebted- 
ness. The test could be based upon the length of time for which the 
note is issued. 

7. Transfers of worthless certificates of indebtedness 

Transfers made by an executor or administrator of certificates of 
indebtedness to a legatee, heir, or distributee should be exempt from 
the tax if the value of the certificates is not greater than the amount 
of the tax involved. This would extend the present rule for stocks to 
certificates of indebtedness. 

B. AGREEMENT IN PRINCIPLE 

1 . Tax on issuance of stock where earned surj)lus is dedicated to capital 

account 
As a matter of principle, no issuance tax should be asserted on the 
mere dedication of earned surplus to capital. 

2. Statutory mergers and consolidations 

In the case of statutory mergers and consolidations the present 
double tax should be eliminated and only the tax imposed by section 
4301 on the issuance of shares or certificates of stock should be made 
applicable. This should be limited to cases where the stock or certifi- 
cates of stock are issued directly by the acquiring corporation to the 
security holders of the component corporation, 

S. Odd-lot transactions 

It is agreed that one of the two taxes on odd-lot transactions be 
eliminated. 



EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 5 

VI. Wagering Tax and Taxes on Coin-Operated Machines 

A. FULL AGREEMENT 

1. Liability of "runners" for the tax on wagers 

It is recommended that the law be amended so that an agent who 
refuses or is unable to name his principal shall be deemed prima lacie 
the principal for the purposes of the 10 percent excise tax on wagers. 

2. Coin-operated amusement devices actuated by remote control 

The definition of a coin-operated amusement device should include 
the type which is actuated by remote control without the use of a com. 

VII. Exemption and Refund Procedures 



A. full agreement 



1. Major exemption and refund or credit provisions 

A more uniform system of exemptions and refunds or credits is 
recommended for manufacturers' sales (or resales) for further manu- 
facture, for export, to State and local governments, and tor fuel sup- 
plies etc., for certain vessels and aircraft. Such rules should also be 
followed where applicable, in the case of retailers taxes and the taxes 
on communications and transportation. This would be done by 
providing for the permanent registration of purchasers tor any ot the 
exempt purposes and tax-free sales would be made only to such pur- 
chasers Tax-free sales would not require the use of exemption 
certificates but would be evidenced by a notation on the sales invoice 
of the registration number of the exempt purchaser. Where a sale 
is made by the initial manufacturer on a tax-paid basis and the 
purchaser subsequently uses or sells the article for one of the prescribed 
exempt purposes, a refund or credit should be allowed upon proof ot 
such a sale. The refund or credit would be allowed whether or not 
there had been an indication at the time of the initial purchase that 
the article was intended for use for one of the specified exempt pur- 
poses. The refund or credit should be made through the initial 
manufacturer. 
2. Special exemption and refund problems 

(a) Areas of double taxation or faulty applications of exemptions 

(1) The credit for tires, tubes, and auto radio and television sets. — 
The crediting device presently provided in section 6416 (c) in the 
case of the excise tax on automobiles and trucks could be extended 
to any manufacturers excise tax. With respect to articles sold for 
export or to State or local governmental units, tax-free sales (or 
credits or refunds) could be allowed in the same manner as for other 
articles sold for export or to State or local governmental units. 

(2) Problems arising where clocks are combined with other articles.-— 
Provision should be made in the statute that where clocks are combined 
with other articles subject to a manufacturers excise tax the manu- 
facturers tax is to apply to the entire combination in the manner now 
prescribed by ruling. 

{b) Technical problems in the manufacturers taxes 
(1) Sale of certain parts or components as repair or replacement parts.— 
Section 4220 should be amended to carry out the intent of Congress 

70820—56 2 



6 EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 

as was stated in both the House and Senate reports in Public Law 
367, 84th Congress, that "the adoption of a single rule exempting parts, 
accessories, or components from tax except where they are sold for 
repair or replacement use, will provide greater equity and simplify 
administration and compliance." Therefore it should be made clear 
that parts or components sold for repair or replacement are still 
subject to tax. 

(2) Use by manufacturer of certain parts or components. — Section 42 1 8 
should be amended to make it clear that with respect to automobile 
parts and accessories, radio and television components, refrigerator 
components, and camera lenses, a tax is still to be imposed where 
such parts are used by the manufacturer as repair or replacement 
parts. 

(3) The definition of refrigerator components. — The exception in sec- 
tion 4221 that the term component means certain specified parts "ex- 
cept when sold as component parts of complete refrigerators, refrig- 
eratmg or cooling apparatus, or quick freeze units (hereinafter 
referred to as 'refrigerating equipment') is no longer necessary since 
Public Law 367 achieves the same results on a broader basis. 

(c) Documentary stamp taxes 

(1) Statute of limitations for stamp taxes. — Section 6501 should be 
amended to provide that the period of limitations should commence 
running in the case of an assessment from the time the stamp tax is 
paid rather than from the time the tax became due. Section 6805 (a) 
should be amended by striking out the third and fom-th categories for 
which redemption can be made, i. e., those where the stamp has been 
improperly or unnecessarily used and where the rates and duties have 
wrongfully been collected. Subsection (c) of this section which 
provides the redemption period of 3 years from the date of purchase 
should be amended to make it applicable only to unused stamps. 

(2) State and local government tax liability in the case of real-estate 
conveyances. — The treatment presently provided by ruling exempting 
State and local governmental units from the tax on conveyances 
should be added to the statute but no distinction should be' made 
between transfers or acquisitions for governmental as distinct from 
proprietary functions. 

(d) Club-dues tax 

(1) Power of attorney required in the case of claims for credit or 
refund.^ — An indication of consent from members, rather than the 
execution of a power of attorney, would be acceptable in the future 
as a basis on which to allow a credit or refund. The procedure to be 
followed would be substantially that which is now followed as in the 
case of manufacturers excise taxes. 

(2) Refund of tax in the case of refund of initiation fee. — Section 
6415 (d) as now interpreted by the Service seems to carry out the 
original intent that a refund on an initiation fee that is repaid to a 
member should be made irrespective of when the initial payment 
was made. 

(e) Cabaret tax and transportation of oil by pipeline. 

Section 6416 should be revised to make it clear that a refund of a 
cabaret tax and the tax on the transportation of oil by pipeline will 
be made where the amount of the tax has been repaid to the consumer 
of the service or where the consumer of the service gives permission 
to the performer of the service to the allowance of the credit or refund. 



I 



EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 7 

VIII. Floor Stock Refunds 

A. FULL AGREEMENT 

1 . General revision of present floor stock refunds of manufacturers^ 
excises.- — The system used under the Excise Tax Reduction Act of 
1954 was found to be, generally speaking, satisfactory. The following 
changes should be made : 

(a) Dealers should be required to file their claims with the manu- 
facturers at some time prior to the time manufacturers have to file their 
claims. A period of 2 months and 10 days after the rate reduction 
should be allowed for the filing of these claims with the manufacturers. 
Manufacturers would then be given an additional period of at least 
1 month or possibly as much as 3 months for the compiling of these 
claims of the dealers and making a claim to the Government. 

(6) Manufacturers should not be required to pay dealers their 
claims pric* to the time the manufacturers file their claims or even 
prior to or at the time the manufacturers receive the benefit of the 
credit or refund from the Government. Instead the manufacturers 
should be required to state that within 30 days after they receive a 
refund or credit they will pass it on to the dealers. 

(c) The filing of claims by manufacturers should be integrated with 
the filing of their quarterly excise tax returns. 

2. Price reduction requirement for gasoline. — ^The requirement that 
gasoline prices be reduced to reflect the refund on tax-paid floor stocks 
seems no longer necessary because of general competitive conditions 
and should be repealed. 

3. Automobile parts and accessories. — The technical error in the 1954 
code which provides for floor stock refunds on automobile parts and 
accessories should be corrected as this was not the intention of Con- 
gress. 

4. Sugar. — Since the time for filing claims for all other floor stock 
refunds is based on statutory time limits, one should be provided in 
the case of tax-paid imported sugar or imported products composed 
in chief value of manufactured sugar. 

5. Alcoholic beverages and cigarettes. — ^Since the price-reduction pro- 
vision for alcoholic beverages and cigarettes was eliminated by the 
1954 code, it is no longer necessary to require claimants of refunds to 
keep the detailed records of the type prescribed in the law, and this 
provision should be deleted. 

IX. Adjustment of Price on Sales to Selling Subsidiary 

The statute should be amended to include the presumption that a 
sale to a selling subsidiary is not at arm's length. 

X. Optional Return System for Cigar Tax 

To meet the special problems of cigar manufacturers who desire to 
have more flexibility in marketing than is possible with the use of 
stamps, the Treasury Department will authorize the use of a a daily 
return system on an optional basis for cigar manufacturers. 



PART 1: SPECIAL EXCISE TAX PROBLEMS 



I. GENERAL 

A. Full agreement 

1. Warranties. — The United States Court of Claims in the case of 
General Motors Corporation, Frigidaire Division v. the United States (121 
F. Supp. 932) held that the separate charge for a 5-year warranty 
which a vendee had to purchase with each refrigerator was part of 
the manufacturer's sale price of the refrigerator. However, the court 
also held that the taxpayer is entitled to a refund of a portion of the 
tax paid equal to the ratio of the expenses incurred in the repair or 
replacement of refrigerators under such a warranty to the original 
sale price of the article. A writ of certiorari filed with the Supreme 
Court of the United States to obtain review of the decision was not 
granted. 

The decision is subject to , the much broader interpretation that 
refund must be allowed a manufacturer or retailer with respect to 
tax attributable to expenses incurred in the repair or replacement of 
a taxable article pursuant to a warranty, express or implied, even 
though no specific or separate charge is made. The court stated: 

When an article is sold with a warranty, and fulfillment of the warranty costs 
the seller a certain sum, he has in fact received for the article only the amount 
by which the sale price exceeded the cost of fulfilling the warranty. He has, in 
effect, given the purchaser an "allowance" when he has spent money for his 
benefit. 

The Court of Claims arrived at its conclusion by interpreting 
section 3443 (a) (2) of the Internal Revenue Code of 1939 (now sec. 
6416 (b) (1) of the Internal Revenue Code of 1954) as meaning that 
the "price" of the article "is readjusted" when the article is repaired 
or replaced without charge in accordance with a warranty. This 
conclusion is contrary to the Government's position continuously in 
effect since this statutory provision was first enacted in 1932. The 
decision applies to the long list of articles subject to manufacturers' 
and retailers excise taxes. 

The decision does not appear to be in accord with the intent of 
Congress in enacting the statutory provision referred to. Section 
621 (a) (2) of the Revenue Act of 1932, which first introduced this test 
into the law, provides as follows : 

SEC. 621. CREDITS AND REFUNDS 

(a) A credit against tax under this title-, or a refund, may be allowed or made- 

******* 
(2) to any person who has paid tax under this title with respect to an 
article, when the price on which the tax was based is readjusted by reason 
of return or repossession of the article or a covering or container, or by a 
bona fide discount, rebate, or allowance; in the amount of that part of the 
tax proportionate to the part of the price which is refunded or credited. 



10 EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 

The report of the Committee on Waj^s and Means contains the fol- 
lowing in explanation of the provision : 

This last provision covers readjustments such as cash or quantity discounts, 
credit for return of goods or containers, and any other bona fide rebate or allow- 
ance amounting to a change in the sale price. [Italic supplied.] 

Where a manufacturer, under a warrant}'", repairs or replaces an 
article of his manufacture which is defective, the sale price of the 
article on which the tax was based has not been changed. The 
manufacturer, in making the repair or replacement, has merely fur- 
nished the purchaser at a later date with the kind and cpialitj^ of 
merchandise which should have been, but was not, delivered in the 
first instance. There is no "readjustment" of the "price" of the 
article since no consideration Hows to the purchaser. Rather, there 
is a readjustment in the article itself to make it serve the purpose 
originally intended. The expense of making good on the warranty 
is part of the "cost" of manufacturing the article made necessary by 
the manufacturer's original failure in producing the article. Such 
expenses are taken into account in determining the manufacturer's 
profit for income tax and similar purposes, but they do not have the 
effect of readjusting the "price" of the article (the consideration 
received by the manufacturer from his purchaser), which is the type 
of readjustment contemplated by the law for the allowance of a 
refund or credit. 

The tax is based on the price paid the manufacturer for the article 
and is passed on to the customer either dhectly by a separate charge or 
indirectly by including the amount in the price of the article. Thus, 
the ultimate purchaser who bore the burden of the tax will derive no 
benefit from the refund or credit granted the manufacturer. In 
effect, the purchaser pays a greater tax on the article than is retained 
by the Government. 

A large amount of revenue will be lost if expenses incurred by manu- 
facturers and retailers in fulfillment of warranties are allowed. The 
Internal Revenue Service has made a survey of district directors' 
ofiices under the five regional commissioners in New York, Chicago, 
San Francisco, Philadelphia, and Cincinnati to determine the claims 
which thus far have been filed on the basis of the Frigidaire decision. 
These regions contain the chief manufactm^ing centers for articles 
subject to manufactm'ers' excise taxes. 

The reports show that claims pending in district directors' offices 
in these regions as of September 1, 1955, have been filed by only some 
70 taxpayers but already amount to $55 million. Many of the claims 
relate only to earlier periods in order to protect the claimants against 
the running of the statute of lunitations. It is expected that the 
same claimants will file further claims covering later periods. In 
addition a large number of manufacturers have not yet filed claims. 
It is anticipated that all claims involved up to the present time alone 
will be many times $55 million. 

Moreover, the decision will result in a substantial administrative 
burden in processing numerous claims without an}'- statutory or judicial 
guidance as to what type of expenses incurred by the manufactm-er or 
retailer may be charged to the repah or replacement of the article. 
For example there is nothing in the court decision, nor in the law, to 
show whether overhead costs are to be included in determming the 
repair expenses and, if so, what type of overhead expenses may be 



EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 11 

allowed, whether the manufacturer's sale price of a part used in the 
repair or the actual direct cost of making such part is to be considered 
as part of the repair expenses. There is also a question whether trans- 
portation, delivery, insurance, installation, and similar costs are to 
be included as repair expenses for which refund is to be computed, 
since such costs under the law are excluded in establishing the sale 
price on which tax is originally computed. Claimants have included 
the following items of costs in justifying the amounts claimed: (1) 
direct labor; (2) parts; (3) applied standard burden; (4) payments 
made to authorized service agencies; (5) transportation charges on 
the incoming unit for repair; (6) transportation charges on the out- 
going repaired unit; (7) factory supplies; (8) expense of clerical billing; 
(9) factory clerical expense; (10) payroll taxes; (11) warehousing of 
repair parts; (12) office salaries and supervisory expense; (13) stationery 
and office supplies; (14) travel expense; (15) salaries of repairmen in 
field; (16) outside sales expense; and (17) amounts reimbursed for 
local advertising. Many of these expenses could not be determined 
accurately and claimants of necessity have made arbitrary allocations. 

It is evident that the Frigidaire decision will involve a substantial 
loss of Government revenue not previously anticipated, be difficult 
to apply because the lack of statutory guidance, and is not in accord 
with congressional intent. 

Therefore, it is suggested that the code be amended to make clear 
that a readjustment in sale price giving rise to a credit or refund does 
not occur with respect to the expenses sustained by a taxpayer in 
fulfilling his warranty. 

In order to lay at rest any question as to application of the tax 
in the case where the taxpayer makes a separate compulsory charge 
it is also suggested that the definition of sales price for purposes of the 
retailers' and manufacturers' taxes be amended to include specifically 
compulsory charges for the warranty of the articles. 

It is believed that the report accompanying such legislation should 
indicate that these amendments are declaratory of the intent of 
Congress as originally expressed in enacting section 6416 (b) (1) of 
the 1954 Code and the corresponding provisions of the 1939 Code 
and prior laws. 

2. Cooperative advertising. — In 1932 the Service published a ruling 
hoJding that additional charges billed by a manufacturer to a dis- 
tributor or dealer for advertising may be excluded from the selling 
price if it could be established that the value of the advertising serv- 
ice equaled or exceeded the amount so collected. These amounts 
could be excluded from the tax base only if they were shown sepa- 
rately on the invoices to the customer and were expended for local 
advertising. The ruling also provided that all national advertising 
is an expense to the manufacturer and must be borne by him. 

In F. W. Fitch Company v. United States (323 U. S. 582(1945)), 
the Court concluded that none of a manufacturer's advertising costs 
may be excluded in determining the sales price subject to tax. 

The basic questions involved in treatment of cooperative adver- 
tising are: 

(1) Whether such charges are initially includible in the manu- 
facturer's sales price on which tax is to be based, or 

(2) Whether, if such charges are initially includible, allow- 
ances for advertising expenditures constitute readjustment of the 
manufacturer's selling price for tax credit or refund purposes. 



12 EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 

This problem depends upon ^Nhether the amount paid by a manu- 
facturer's vendee for advertising purposes becomes the property of 
the manufacturer to hold or dispose of as he chooses. If so, such 
amount should bo included in the basis of the tax. On the other hand, 
the advertising charge m.a,y represent a contribution by the customer 
to a fund which never becomes the property of tlie manufacturer, but 
remains the property of the customer or group of customers who con- 
tribute to the fund. In this situation, tlic advertising charge should 
not be a part of the manufacturer's tax base. 

Based on tlie foregoing, the present position of the Service with re- 
spect to cooperative advertising substantially is as follows: 

(1) The distinction between national and local advertising is 
abolished. 

(2) Where a manufacturer's selling price to his customer con- 
tains an unsegretfted advertising charge, it is a part of his tax 
base. 

(3) In the case where a manufacturer makes a separate charge 
to his distributor for advertising and the proceeds are kept in a 
separate account earmarked for advertising, the separate adver- 

• tising charge is not a part of the tax base. This exclusion of the 
advertising charge from the tax base can be supported b}'' estab- 
lishing that the charge is either listed separately on the sales in- 
voice or billed separately; the contributions from distributors are 
set aside as a fund to be used for advertising for the benefit of 
these contributors; and the funds are so used or the unexpended 
portion is held in trust or refunded to the contributor upon his 
withdrawal from the program. 

(4) Even in the case of a separate fund (as outlined in (3) 
above), where the manufacturer makes a contribution to the 
advertising account, then in accord with Fitch v. V. S., supra, 
the amount of the manufacturer's contribution ma}^ not be 
deducted in computing the taxable sale price. However, subse- 
quent allowances from such contributions to distributors for 
expenditures by them or their dealers in advertising are to be 
treated as readjustments of sale price under section 6416 (b) (1) 
of the Code. 

The recognition of the allowances in the situation last described as 
readjustments of sale price is distinguishable from the issue involving 
the treatment of expenses incurred in fulfilling warranties on the 
ground that they constitute direct allowances by the manufacturer 
to his customer as a part of the sales program in which the manufac- 
turer is involved. These adjustments are, as indicated before, made 
to the manufacturer's vendee and are not dependent upon conditions 
which may subsequently occur with respect to the article in the 
hands of the ultimate consumer many steps removed from the 
transaction upon which the imposition of tax occurred. 

3. Sale of installment accounts. — Wliere an article subject to a re- 
tailers or manufacturers excise tax is sold by the manufacturer or 
retailer under an mstallment sales contract, only a part of the tax 
becomes due with each instaUment. The law provides (sees. 4053 
and 4216) that the manufacturer or retailer is to pay a portion of the 
total tax upon each payment in the ratio that such payment bears 
to the total charge for the article. 



EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 13 

There is no provision in present law setting forth how the tax is to 
be computed where installment accounts are sold or otherwise dis- 
posed of by the manufacturer or retailer. The Internal Revenue 
Service has taken the position that in such cases tax is to be computed 
on the face (unpaid) amount of the installment obligations disposed 
of, except in the case of a sale pursuant to a bankruptcy or receiver- 
ship proceeding. In the latter case, the tax is computed on the 
amount realized on the disposition of the installment accounts. How- 
ever, where a sale is made, the remainder of the tax immediately be- 
comes due because the seller is no longer collecting his payment on an 
installment basis. 

It is suggested that any uncertainty as to congressional intent be 
resolved by statute. The rule applied by the Service is proposed as 
being a reasonable one if the rule used for bankruptcy and receiver- 
ship sales is extended to sales under any other legally distressed 
situations. 

• Maintenance of liability for tax in the full amount of the original 
sales price is suggested where installment accounts are sold under 
ordinary sales arrangements for several reasons. Since the customer 
receives no price or tax reduction as the result of the sale of his install- 
ment debt, the basis of the transaction giving rise to the tax liability 
has not changed. The manufacturer or retailer may sell the accounts 
at a discount, but this is his own business decision as to the value to 
him of a current smaller amount of money against future larger 
amounts. It might also be pointed out that a manufacturer or retailer 
who sells on a normal credit arrangement and is subsequently unable to 
collect is not relieved of liability for tax due. In the case of bank- 
ruptcy sales, etc., the amelioration suggested is in accord with the 
taxpayer's loss of control over his affairs and the general approach of 
granting relief in such cases. 

4. Installment accounts under Louisiana law. — Sections 4053 and 
4216 (c) of the 1954 Internal Revenue Code provide that if an article 
subject to retailers' or manufacturers' excise tax is (1) leased; (2) 
sold under a contract providing for payment of the sale price in 
installments with the seller retaining title to the article until full 
payment has been made; (3) sold on a conditional sale basis; or (4) 
sold under a chattel mortgage arrangement with the sale price to be 
paid in installments, the tax is to be paid on an installment basis 
proportionate to the total price represented by each payment. 

Under the laws of Louisiana a seller may not retain title to the 
article until the sales price is fully paid and may not enter into a 
mortgage arrangement which would give him unrestricted rights of 
repossession if the purchaser fails to meet all his payments. Thus, 
if a purchaser in Louisiana disposes of the article and transfers pos- 
session to a third party before completing payments on his install- 
ment contract, the seller has no right to repossess the article in case 
the purchaser defaults in his obligations. However, Louisiana does 
recognize a contract which provides for payment of the sales price 
on an installment basis and gives the seller a lien on the article while 
still owned by or in the possession of, the purchaser which may be 
enforced in the event of default by appropriate court proceedings. 

While this problem is now under consideration in the Revenue 
Service, there is a possibility that such an arrangement, although 

70820—56 3 



14 EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 

recognized under Louisiana law as giving the seller a limited form of 
lien on the article, docs not constitute a chattel mortgage arrange- 
ment within the contemplation of paragraph (4) of sections 4053 and 
4216 (c) of the code and that the taxpayer in such case would be 
required to pay the tax in full during the return period in which the 
sale was made even though he would not receive his payments in 
full for some time. To make it clear that taxpayers in Louisiana 
are to have the privilege of deferring their tax payments under the 
mstallment t5^pe of contract with retention of lien which is recognized 
under Louisiana law, it is suggested that sections 4053 and 4216 (c) 
be appropriately amended to cover such types of contracts. 

5. Consolidated rf^wr /is. —Frequently small retailers and door-to- 
door salesmen are unwilling to handle articles subject to a retailers 
excise tax because of the problem of accounting for and making a 
return of the tax. This usually applies m the case of toilet prepara- 
tions and jewehy. jMoreover, in some cases, retailers who make only 
a few sales of such taxable articles and door-to-door salesmen fail to 
make returns. In order to obviate these difficulties, wholesalers and 
distributors of articles subject to the retailers excise tax have indi- 
cated a willingness to file returns in certain cases on behalf of small 
retailers or house-to-house canvassers who handle their products. Such 
a procediu*e would benefit small business men and would result in 
greater tax compliance, since the wholesaler or distributor is in a posi- 
tion to determine from his books and records the amount of sales of 
taxable articles. 

In addition, independent truckers will often refuse to haul the 
products of shippers, such as danies, coal companies, etc., since such 
service would require the trucker to collect and return the transpor- 
tation of property tax on the charge made for the hauling. Since the 
tax here involved is imposed upon the person making the payment 
for the transportation service, shippers who engage truckers knowing 
that such truckers will not collect the tax expose themselves not only 
to direct assessment of the tax due with respect to the taxable pay- 
ment but also to the addition of civU penalties for wilfully failing to 
pay the tax known by them to be due. In order to have readily 
available the services of these truckers, shippers have requested per- 
mission to file returns and pay tax on behalf of such truckers upon I 
whom the law vests the obligation to collect and return the tax. ! 

It is suggested, therefore, that the code be amended to provide 
that the Secretary or his delegate may authorize by regulations, and 
subject to such limitations and conditions as appear appropriate or ad- 
ministratively desirable, that a person liable for the filing of returns of 
retailers taxes and the transportation of property tax may by power of 
attorney designate his supplier or shipper to perform such acts as are 
required of him in connection with the filing of returns relating to such 
taxes. It should be further provided that all applicable provisions of 
law (including penalties) should be applicable to the agent or the per- 
son so designated, but the retailer or shipper for whom such a^ent or 
other person acts would remain subject to the provisions of law (mclud- ' 
ing penalties) applicable to them. Such a provision would be generally 
comparable to section 3504 of the code which permits employers of 
persons covered by the employment tax provisions to designate 
fiduciaries, agents, or other persons who pay the wages of an employee 
or group of employees of such employer to file returns on behalf of 
the employer. 



EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 15 

II. manufacturers' excises 

A. Full agreement 

1. Bebuilt automotive parts. — The sale of automotive parts and ac- 
cessories by the manufacturer is taxed under section 4061 (b) of the 
code. Regulation 46 provide that any person who produces a tax- 
able article from scrap, salvage, or junk material, as well as from new 
or raw material, (1) by processing, manipulating, or changing the 
form of an article, or (2) by combining or assembhng two or more 
articles, is a "manufacturer" for purposes of the law. 

It has been a long-established position of the Service that the sale 
of rebuilt articles subject to the manufacturers' excises incurs liability 
for the taxes imposed. The conclusion of the Service that rebuilding 
constitutes manufacturing and that the sale of rebuilt parts is taxable 
has been sustained by the courts (Clawson and Bals, Inc., v. United 
States, 182 F. 2d 402," cert, denied, 340 U. S. 883; Armature Exchange, 
Inc., V. United States, 116 F. 2d 969, cert, denied, 313 U. S. 573) 

S. T. 927 (C. B. 1942-2, p. 225) outlined in general the circum- 
stances under which a person may be regarded as a manufacturer as 
to articles which may have been rebuilt, repaired, or otherwise restored 
to usefulness. 

The Service later published S. T. 932 (C. B. 1945, 431) more spe- 
cifically relating to the rebuilding or reconditioning of automobile 
parts or accessories. There it was held that the mere disassembling, 
cleaning and reassembling performed in reconditioning used auto- 
mobile fuel pumps, water pumps, carburetors, distributors, shock 
absorbers, windshield wiper motors, brakeshoes, clutch disks, voltage 
regulators, etc. do not incur manufacturers' excise tax regardless of by 
whom performed. 

The manufacturers' excise tax applies to the rebuilder's sale from 
his stock on hand of (a) rebuilt batteries, (6) rebabbited or machined 
connecting rods, (c) rebuilt clutch assemblies, (d) resurfaced clutch 
plates, (e) rewound armatures, (/) reassembled generators containing 
armatures rewound by the reassembler, (g) remetalized crankshafts, 
(h) motors in which the cylinders are machined, (i) shock absorbers 
in which some of the parts are machined, and (j) similar items in which 
machining, rewinding, or comparable operations are performed. 

The ruling further distinguishes between situations involving 
persons engaged in the business of rebuilding and mere repairmen, i. e. 
whether the person rendering the service was doing so on a custom 
basis with title remaining in the customer for whom the job was being 
done or regularly engaged in the rebuilding of articles for resale. 

In 1954 the Service published a ruling superseding S. T. 932 holding 
that a "manufacturer" is further defined as a person engaged in the 
production of rebuilt auto parts or accessories for sale or for use in 
further manufacture of other articles for sale. The terms "recondi- 
tioning," "rebuilding," and "repairing," were not to be considered 
synonymously. Each refers to a separate and distinct operation. 
The conclusions of the Internal Revenue Service as to what is com- 
prised within each operation and the taxable consequences are as 
foUows: 

(a) Reconditioning. — The mere disassembling, cleaning, and 
reassembling of used automobile fuel pumps, water pumps, car- 
buretors, distributors, shock absorbers, windshield-wiper motors, 



16 EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 

brakeshocs, clutch disks, voltage regulators, and so forth, are 
regarded as reconditioning operations distinct from the manu- 
facture or production of rebuilt articles. The sale or use of 
such reconditioned parts is not taxable, regardless of who per- 
forms the reconditioning operations. 

(6) RchuUding. — Reboring or other machining, rewindhig, and 
comparable major operations performed on used parts being 
processed for sale or for use as components of other articles for sale 
are defined as rebuilding operations constituting manufacture for 
purposes of the tax. The person owning parts being rebuilt 
for such disposition is the rebuilder (manufacturer) and is liable 
for the tax on his sales of tlie rebuilt parts. The tax applies 
whether the machining, and so forth, operations are performed 
by the rebuilder himself or by some other person in his behalf. 
The manufacturers' excise tax was held to apply to the re- 
builder's sale of (a) rebuilt batteries, (6) rebabbitted, or machined 
connecting rods, (c) resurfaced clutch plates, {d) rewound arma- 
tures, (e) reground or remetalized crankshafts, (/) engines in 
which blocks are machined (e. g., C3dinders rebored, new sleeves 
inserted, with or without cylinders being rebored), or new blocks 
installed, and {g) similar parts on which machining, rewinding, or 
comparable operations are performed. 

(c) Repairing. — The restoration of an owner's part to usable 
condition (but not for purposes of sale or for use as a component 
of other articles for sale) constitutes a repair operation whether 
performed by the owner himself or by others acting in his behalf. 
Representations were made to the Service that in restoring used 
generators, the only processing involved was the rewinding of the 
armature and that the balance of the generator was merely disas- 
sembled and cleaned. Upon reassembly the rewound armature would 
then be slipped and fastened into the rest of the generator. Thus, 
it developed that where a rebuilder performed all of the operations 
necessary to the useful restoration of the generator in his own shop 
he was paying a tax based upon his net sale price of the rebuilt gen- 
erator. If a different operator took in a used generator and sent out 
the armature to another shop to be rewound, the tax on that trans- 
action was applied only to the amount charged by the rewinder for 
his operations or sale price of the rewound armature. This price 
was, of course, considerably less than the price charged by the 
rebuilder who completely processed a used generator. 

As a result of this problem, the Service later published a ruling 
holding that in the reconditioning of a used generator which requires 
the replacement of the armature with one that has been rewound by 
the person restoring the generator to useful condition for sale, the 
manufacturing or rebuilding operation is performed on the armature 
only and the tax is computed on the established selling price of the 
armature component. 

This latest position of the Service has been cited by taxpayers to 
support a conclusion that similarly the only manufacturing or re- 
building operation involved in restoring an automobile engine to useful 
condition is confined to the actual machining operations of those 
components of the engine requiring such physical processing. The 
Service has resisted adoption of this theory on the ground that in 
rebuilding an automobile engine the necessary operations involving 



EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 17 

machining of connecting rods, regrinding of crankshafts, reboring of 
cyhnders, and so forth, are all done as one operation and that the 
individual manufacturing operations are not as a practical matter 
farmed out. As a matter of fact, most engine rebuilding today of any 
consequence is being done on assembly-line basis comparable to the 
manufacture of new engines. 

It is understood that the Service will reexamine its latest published 
ruling on the question of used generators to determine its reality in 
the light of the general tests established as to what constitutes rebuild- 
ing. The basis for this reexamination will be to determine whether 
in the case of restoring used generators, the disassembling of the 
generator and its integral parts, the rewinding of the armature, the 
reconditioning of the balance of the generator, and the reassembling 
of the completely restored generator constitutes in fact a complete 
rebuilding operation and, therefore, manufacture. Such a conclusion 
would then be consistent with the situation as applied to the rebuilding 
of engines. 

2. Electric direct motor-driven fans and air circulators. — There is 
presently imposed a 5-percent excise on an extensive list of electric, 
gas and oil appliances. In the case of 21 appliances or groups of 
appliances, the articles must be of the household type before a tax is 
imposed. However, electric direct motor-driven fans and air cir- 
culators are taxed unless they are of the industrial type. 

The Internal Revenue Service has interpreted the phrase "not of 
the industrial type" as meaning that the tax applies not only to fans 
and air circulators of the household type, but also of the type used in 
stores, offices, restaurants, and similar places. However, in practice 
it has been found that the fans and air circulators commonly used in 
commercial establishments are also used extensively in industrial 
establishments. Thus, it appears that in practice fans and air circu- 
lators are either of the household type or of the industrial type and 
that there is no intermediate classification. 

To clarify the law and to provide a uniform rule, it is suggested tha,t 
electric direct motor-driven fans and air circulators be taxed only if 
they are of the household type. Furthermore, it is believed that this 
will result in improved administration and better understanding of 
the law on the part of both the Service and the industry. 

It appears that no revenue loss will result from this change. 

3. DeHnition of radio and television components. — -Public Law 367, 
84th Congress, amended section 4141 which imposes a tax on radio 
and television sets, components therefore, phonographs and records, 
to provide that except in the case of radio and television components 
and phonograph records the tax imposed by section 4141 is to apply 
only to articles of the ''entertainment type." Section 4142, which 
defines radio and television components, was not changed by Public 
Law 367. This latter section provides that the term "radio and tele- 
vision components" means certain parts, and so forth, "which are 
suitable for use on or in connection with, or as component parts of 
any of the articles enumerated in section 4141, whether or not pri- 
marily adapted for such use." 

The above two sections appear contradictory. The sentence 
added to section 4141 by Public Law 367 appears to provide that 
radio and television components are taxable whether or not they are 
of the entertainment type, while the sentence in section 4142 defining 



18 EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 

these components in effect appears to state that only those which are 
suitable for use on or in connection with entertainment-type articles 
are taxable. It can, of course, be argued that "commercial" sets, 
as well as those of the entertainment type, are "enumerated" in 
section 4141 even though no tax is imposed with respect to them. 

It is suggested that the tax on television and radio components be 
clarified, and that it be applied only to those components which are 
suitable for use on or in connection with entertainment-type sets. 
This method of clarifying this problem is suggested because it appears 
inconsistent to limit the tax on radio and television sets to those of 
the entertainment type without imposing a similar limitation on 
parts. Moreover, limiting the tax on these components in this manner 
would make it necessary to determine only what constitutes enter- 
tainment-type radio and television receiving sets. It would not then 
also be necessary to determine what constitutes other types of tele- 
vision and radio sets in order to know what components are taxable. 

It is estimated that the revenue loss under this provision will be 
very small. 

B. Agreement in principle 

1. Leases. — Sections 4053 and 4216 of the Internal Revenue Code 
of 1954 deal with the definition of price upon which retailers and 
manufacturers are required to pay the taxes imposed upon their sales. 
These sections provide that in the case of a lease of an article there is to 
be paid upon each payment with respect to the article that portion 
of the total tax which is proportionate to the portion of the total 
amount to be paid represented by such payment. 

It has been held by the Service that each lease payment is taxable 
at the applicable rate, notwithstanding that the total of payments 
under the original and subsequent leases may exceed the price for 
which the retailer or manufacturer sold like articles in the ordinary 
course of business. This has given rise to protests by taxpayers to the 
effect that this result was inequitable and discriminatory. 

In Public Law 317, 84th Congress, 1st session, the Congress recog- 
nized this situation and enacted an amendment to section 4216 
providing that in the case of leases of trailers or semitrailers suitable 
for use in connection with passenger automobiles, a limited total tax 
was to be paid based upon the fair market value of the trailer on the 
date of the initial lease. It was further provided that the tax could be 
paid upon each lease payment equal to the rate of tax which would be 
imposed on the sale of the trailer or semitrailer until the total of the tax 
payments under the lease and any prior lease equaled the total tax. 
Appropriate adjustments were also provided for in case a leased 
article was sold prior to the time the total tax had been paid. 

The principal of a limited tax on leased articles equivalent to the 
tax that would have been due if the article had been sold when new 
seems reasonable. Otherwise, the law acts to penalize competing 
methods of doing business. However, where the manufacturer (or 
retailer) never sells a given type of article, a limited total tax has 
little justification. In such cases the lessor has no fair market price 
upon which to compute a total tax and has deliberately decided not 
to compete on the same basis with those making outright sales. 

If a change of this t^'^pe were adopted, experience with Public Law 
317 suggests that administration and compliance could be eased by 



EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 19 

providing that the tax due on articles under lease on the effective date 
of the change be computed on the basis of the value of the article on 
the effective date as shown on the books of the lessor rather than the 
fair market value on such date. 

While the Treasury Department agrees in principle with a limited 
total tax provision for leased articles, it does not suggest current 
action on this problem because it is anticipated that a relatively 
significant revenue loss would be involved. 

III. RETAIL EXCISES 

A. Full agreement 

1. Semiprecious stones purchased by lapidarists. — Section 4001 of 
the Internal Revenue Code imposes a 10-percent retail excise on 
jewelry. For the purposes of the tax, pearls, precious and semiprecious 
stones, and imitations thereof are considered as jewelry. These 
statutory terms have created certain definitional problems in the 
enforcement of the tax. 

In earlier years consumers bought gems only in finished form and 
not in a rough state. However, the growth of the lapidary and 
mineral hobbies have created a new industry in the gem field which 
has created a demand for different minerals and other raw material 
to pursue their hobbies. The problem which arises is how to determine 
which stones are taxable when the stones are still in their natural 
state. The difficulty is in determining the quality of the material 
from the point of view of hardness or gem quality. 

The Internal Revenue Service has ruled that the tax imposed by 
section 4001 does not apply to mineral substances or varieties not 
commonly and commercially known as precious or semiprecious 
stones, or, to stones which are of an inferior quality and unsuitable 
for cutting and polishing into gems when such substances are in the 
natural state or especially designed as specimens for display of the 
material. In addition, the Internal Revenue Service has ruled that 
rough gem material 6 or more in hardness on the Mohs' scale is 
taxable with various exceptions for softer stones and has relied in 
determining what stones are commonly and commercially known as 
precious or semiprecious upon commonly accepted reference works in 
the field. 

However, hobbyists collect, cut, and polish whatever stones which 
strike their fancy, and suppliers, to keep pace with their customers' 
desires, make available for sale the varieties of stones in demand. As 
a result, a piece of material offered for sale by a supplier will often 
give rise to a number of difficult problems. For example, it must be 
determined if the stone qualifies as one which is precious or semi- 
precious. In determining whether or not the material is gem quality 
it may measure in the Mohs' scale in hardness from dji to 6 in various 
places on the same piece. Moreover, whether or not a stone is suitable 
for cutting and polishing into gems may be determined only after it 
is cut and polished. By the same token, it may be difficult, or even 
impossible, to judge its quality until it is cut or polished. 

Because of the difficulty of these questions and the different defini- 
tional problems arising from the nature of the material subject to the 
tax, it is suggested that a test be supplied in the statute which will 
render, insofar as is possible, certainty for both the Internal Revenue 



20 EXCISE TAX TECIES^ICAL AND ADMINISTRATIVE PROBLEMS 

Service, and the persons subject to the tax. Accordingly, it is pro- 
posed that in the case of semiprecious stones the test of taxabihty 
be made to turn upon the finished state of the stone, and that no 
semiprecious stone which has not been cut or pohshed be subject 
to the tax. Tliis proposal contemplates that existing law and practice 
be retained but that an additional test be added in the case of semi- 
precious stones to the effect that they are taxable only when they are 
cut or polished. It is believed that the proposed test will furnish 
both those charged with the duty of administering the tax and those 
subject to it a more certain standard by which the taxability of a given 
piece of material can be determined. 

2. "Basket" clause under luggage tax.- — ^Section 4031 imposes an 
excise tax on the retail sale of luggage. Eighteen separate items are 
specifically named as subject to this tax. The section also contains 
a provision which subjects to tax "Other cases, bags, and kits (without 
regard to size, shape, construction, or material from which made) for 
use in carrying toilet articles or articles of wearing apparel." This 
"basket" clause subjects articles to tax which are not specifically 
named in the section but which are determined to be cases, bags, and 
kits "for use in carrying toilet articles or articles of wearing apparel." 

This clause is indefinite, and retailers are not always sure which 
articles are subject to luggage tax. An article which may have a use 
in carrying wearing apparel may also be used, or be suitable for use, 
equally well for other purposes. In such case, if the article is sold in 
the luggage department of a retail establishment and held out, as 
provided in section 4031, "for use in carrying wearing apparel," it 
is subject to tax. On the other hand, if the same article is sold in a 
nonluggage department of a retail establishment and held out for a 
nontaxable use, there would be no tax on the sale of the article. 

It is realized that cases, bags, and kits which are in general use for 
carrying toilet articles or articles of wearing apparel are varied and 
that new ones are constantly being introduced. This makes it im- 
possible to provide as much certainty as might be desired. However, 
much more certainty can be provided by removing the basket clause. 
Thus it is suggested that this provision be removed from section 4031 
and that in lieu thereof a somewhat longer list of articles be subjected 
to tax. Such a list might include the following articles: 

Bathing suit bags 

Beach bags or kits 

Billfolds 

Briefcases of leather or imitation leather 

Brief bags 

Camping bags 

Card and pass cases 

Carryall bags 

Cariying kits 

Collar cases 

Cosmetic bags and kits 

Dressing cases 

Duffelbags 

Furlough bags 

Garment bags designed for traveling 

Hatboxes for use by travelers 

Haversacks 

Key cases or containers 

Knapsacks 

Knitting or shopping bags (suitable for use as purses or handbags) 



EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 21 

Makeup boxes 

Manicure set cases 

Memorandum pad cases * (suitable for use as pass cases, billfolds, purses, or wallets) 

Musette bags 

Pocketbooks 

Purses and handbags 

Ring binders, capable of closure on all sides, of leather or imitation leather 

Salesm.en's sample or display cases, bags or trunks 

Satchels 

Shoe and slipper bags 

Suitcases 

Toilet kits and cases 

Tote bags 

Traveling bags 

Trunks 

Vanity bags or cases 

Valises 

Wallets 

Wardrobe cases 

IV. EXCISES ON FACILITIES AND SERVICES 

A. Full agreement 

1. Geographical scope of the general admissions tax. — ^The tax on gen- 
eral admissions imposed by section 4231 (1) is levied on ''the amount 
paid for admission to any place." However, the law does not indicate 
whether the admission or the payment therefor, or both, must take 
place within the United States. This has created an area of uncer- 
tainty, especially in sections near the borders of the United States. 
There tickets may be purchased in the United States for events which 
are to take place outside the United States, and vice versa. 

To resolve this uncertainty, it is suggested that the law definitely 
state the geographic area to which the admissions tax applies. The 
rule suggested is to make the tax applicable to admissions only v/hen 
the events take place in the United States. Thus, persons purchasing 
tickets inside the United States for events outside the United States 
would be treated as if they had purchased the tickets upon entrance 
to the event rather than beforehand. 

Acceptance of the rule suggested should not place additional burdens 
upon proprietors of taxable events in the United States. The regula- 
tions now require printing of the established price and the tax thereon 
on tickets to taxable events and the collection and remission of such 
tax by the proprietor. Where tickets are sold to a domestic event in a 
foreign country, by a branch office or agent of the domestic proprietor, 
the latter would merely require the tax to be reflected in the price as 
in the case of sales at the box office. The proprietor then would be 
liable for tiu-ning over the tax to the Government in the usual manner. 

2. Exclusive use of cabaret premises. — ^As evidenced by the testimony 
before this subcommittee and correspondence introduced into the 
record, considerable confusion exist in taxpayers minds concerning 
the application of the cabaret ta;x imposed by section 4231 (6) of the 
Internal Revenue Code of 1954 to private affairs conducted by organ- 
izations in cabarets. 

Section 4231 (6) imposes an excise equivalent to 20 percent of all 
amounts paid for admissions, refreshment, service, or merchandise at 
any roofgarden, cabaret, or other similar place furnishing a public 

1 If suitable for use as pass cases, billfolds, purses, or wallets. 
70820—56 1 



22 EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 

performance for profit by or for any patron or guest who is entitled 
to be present during any portion of such performance. Ballrooms or 
dancehalls where the serving or selling of food, refreshment, or mer- 
chandise is merely incidental are explicitly excluded from the definition 
of cabaret by section 4232 (b). The same subsection specifically 
excludes mere instrumental or mechanical music from the definition 
of entertainment. Section 4232 (c) provides that a performance shall 
be regarded as being furnished for profit even though the charge 
made for admission, refre'shment, service, or merchandise is not in- 
creased by reason of the furnishing of such performance. 

The application of the cabaret tax to affairs conducted by private 
organizations on premises which are regularly employed as cabarets 
subject to the tax may be illustrated by the following two extreme 
factual situations: 

a. A room which is customarily utilized as a cabaret is rented on a 
particular night to a private organization for the purpose of holding 
a dinner and providing entertainment. The affair is in the complete 
control of the organization as is the sale of tickets and members of the 
general public are not admitted. The proprietor furnishes the dinner 
to the organization. In addition the same entertainers who regularly 
perform in that room on other nights are furnished to provide enter- 
tainment. In this situation, the Internal Revenue Service has ruled 
that the arrangements made by the private organization are to be 
regarded as a mere reservation of tables and thie cabaret tax is to 
apply to the payment made by the private organization to the pro- 
prietor and to all amounts paid for refreshment, service, and mer- 
chandise. However, under such circumstances no cabaret tax attaches 
to the amounts paid to the private organization for tickets to the affair 
nor is any admissions tax. 

b. Where a room, which is not customarily utilized as a cabaret, is 
rented to a private organization for the pm'pose of holdmg a dmner 
and providmg entertainment, and the private organization has com- 
plete control of the sale of the tickets for the affau- and members of 
the general public are not admitted, the Internal Revenue Service has 
ruled that the cabaret tax is not applicable to the affair even though 
the proprietor furnishes the dmner to the organization in addition to 
entertainment provided by entertainers who may be performing regu- 
larly in another room on the premises. However, if the organization 
makes a fixed charge to persons attending the affair which is in 
excess of the charge made by the proprietor for the dinner, that part 
of the charge which is in excess of the charge made for the dinner is 
subject to the admissions tax imposed by section 4231 (1) of the 
Internal Revenue Code of 1954. 

The foregoing rule is also applied where the organization makes its 
own independent arrangements for entertainment. 

While the two foregoing examples are clear enough and the results 
generally accepted by taxpayers, difficulties arise administering the 
cabaret tax when these factual situations begin to vary in degi-ee. 
For example, where a room which is customarily utilized as a cabaret 
is rented to an organization for the conduct of a private affair and 
(he organization contracts with the proprietor for the dinner and nego- 
tiates for the entertainment regularly performed in that room on 
nights when the room is open to the general public and as a result 
of such negotiations pays a pro rata portion of the fee regularly 



EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 23 

received by such entertainers directly to the proprietor, the Inter- 
nal Revenue Service has ruled that the cabaret tax does not apply 
(although the admissions tax may). On the other hand, because of 
the terms of the statute, the Internal Revenue Service has been forced 
to rule that the cabaret tax is applicable in the same situation where 
the facts uidicate that the organization has made a flat payment to 
the proprietor to cover the dinner and regularly employed entertain- 
ment even though the organization provides some additional entertain- 
ment of its own. 

In order to remove the existing uncertainties and to provide a 
definite rule for the convenience of both taxpayers and those charged 
with enforcing the cabaret tax, it is proposed that the Internal Reve- 
nue Service reexamine its rulings in this area and issue new rulings to 
provide that where a private organization conducts an affair in a room 
customarily and regularly used as a cabaret to which the tax applies 
and negotiates with the^ proprietor to provide the dinner and any 
other services desu'ed, but not for the entertainment, the cabaret tax 
will not apply if the private organization by independent negotiations 
provides its own entertainment, the entertainers are not regularly 
employed by the proprietor in the room and are different individuals 
from those employed in the room both prior to and after the affair in 
question. It is bdieved that this proposal will eliminate the existing 
confusion m the field and provide a rule which will be certain in its 
application and easily understood not only by taxpayers but by those 
charged with the duty of enforcing the cabaret tax in the field. 

The foregoing proposal would require that the Interna] Revenue 
Service review the ruling which has in the past permitted private 
organizations to escape the cabaret tax where the entertainment pro- 
vided at such affairs is that regularly employed in the room and a pro 
rata proportion of the regularly charged fee for entertainment is paid 
to the proprietor on behalf of the entertainment. 

3. Collection of tax on amounts paid to concessionaires at cabarets. — 

The cabaret tax is levied upon — 

* * * all amounts paid for admission, refreshment, service, or merchandise, at 
any roofgarden, cabaret or other similar place * * *. 

It is not unusual for proprietors of cabarets to sell or lease conces- 
sions to other persons who sell refreshments, service, or merchandise 
to the patrons of the cabaret, but the payments the concessionahes 
receive are often not reflected in the books of the proprietor nor does 
the concessionaire always file returns and pay tax upon the amounts 
he receives as payment for his refreshment, service, or merchandise. 
In addition, concessionaires change frequently so that locating them 
for the purposes of tax collection is difficult. 

To assure the payment of the tax and the availability for tax deter- 
mination of a more readily identifiable person, consideration should 
be given to providing that the proprietor, owner or lessee of a cabaret 
is to collect the cabaret tax from the concessionaires and include such 
amounts in making monthly deposits and quarterly returns with re- 
spect to his tax liability on other payments received by such proprietor, 
owner or lessee for admission, refreshment, service, or merchandise. 
The proprietor, owner, or lessee would be subject to all of the pro- 
visions of law now applicable with respect to persons liable for the 
collection and payment of taxes on admissions as regards the tax 
liability of the concessionaires in his cabaret. 



24 EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 

4. Life, memberships in social clubs. — The tax on clues to social clubs 
imposed by section 4241 requires that in the case of life memberships 
an annual tax shall be paid efiuivalent to the tax upon the amount 
paid by active resident annual members for dues or membership fees 
other than assessments. In practice, this means, in most cases, a 
tax on the highest annual rate of dues. No tax is levied upon the 
payment as such for the life membership. 

The present system may result in the long run in a tax bearing no 
relationship to the amount paid for the life membership, or the value 
of its perquisites if, as in some cases, it is an honorary or free life 
membership. 

It is suggested that the annual tax on life memberships be equivalent 
to the tax on the annual dues and membership fees of the type of 
annual membership providing privileges most nearly like that of the 
life membership. This would provide tax relief in those cases where 
the life membership provided privileges of a limited nature compared 
to those of an active resident member. 

5. Communications taxes. — The Treasury and Joint Committee 
staffs at this time are not able to make any joint recommendations in 
the area of the communications taxes. A large amount of valuable 
material bearing on possible changes in these taxes has been received 
only quite recently, and it has not been possible as yet to adequately 
examine the suggestions. 

The staffs agree that, if possible, it would be desirable to revise 
substantially the basis of these taxes in order to simplify and con- 
solidate them, to bring them more in line with technical advances 
which have occin^red in recent years, and to remove competitive 
problems which have developed since these taxes were last reviewed. 

If it meets with the subcommittee's approval, the staffs will set a 
joint group to study these taxes and report back later this year. 

V. DOCUMENTARY STAMP TAXES 

A. Full agreement 

1. Partnership treatment. — Section 4352 of the Internal Revenue 
Code provides in the case of the transfer of an interest in a partnership 
which holds any stock, stock rights, or certificates of indebtedness that 
the taxes on the transfer of these instruments are to apply to the same 
proportion of these instruments held by the partnership as the interest 
in the partnership being transferred bears to the interests of all of the 
partners. This in effect provides that when an interest in a partner- 
ship is transferred, any underlying securities held by the partnership, 
to the extent of the share represented b}^ the transferred interest, are 
also considered as being transferred. This follows the so-called "ag- 
gregate" rule and in effect treats each partner as if he held separately 
his pro rata share of all partnership property. 

However, courts have held under New York partnership law, which 
generally follows the Uniform Partnership Act, that no stamp tax 
may be imposed upon the adjustment of a partnership interest. 
(See Salomon Brothers & Hutzler v. Pedrick, 105 F. Supp. 210 (1952).) 
The so-called "entity" theory of partnerships has been held to apply, 
and as a result it has been concluded that adjustments of the interests 
of the partners do not result in transfers of the underlying partnership 
property. The "entity" rule, for the most part, is also the standard 



EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 25 

rule adopted in the income tax partnership provisions under the 1954 
code. 

To assure uniform treatment among the various States, and also to 
conform the documentary stamp provisions relating to partnerships 
with those under the income tax, it is suggested that the so-called 
"entity" rule be adopted for transfers of partnership interests in the 
case of the documentary stamp taxes. 

The adoption of the "entity" rule generally would mean that stock 
and bond transfer taxes and real estate conveyance taxes would not be 
imposed with respect to: 

(1) An adjustment of the interests of the partners, 

(2) The sale or other disposition by a partner of his interest, 

(3) The death or retirement of a partner, 

(4) The admission of a new partner, and 

(5) The liquidation of a partner's interest. 

However, in any of the above cases where stocks, bonds, or real 
estate held by the partnership are distributed to a partner in either a 
current or liquidating distribution or are sold to a partner, a transfer or 
conveyance tax would be imposed. The tax would be imposed in these 
cases because the stock, bond, or real estate itself was being transferred 
and not merely an interest in a partnership. Of course, transfer or 
conveyance taxes would be imposed where a partnership is considered 
as being "terminated" under the income tax rules provided in section 
708 (b) and a newly formed partnership continues to use the property 
held by the former partnership. This would be true because in such 
a case the property would be considered as distributed and then 
recontributed. A transfer or conveyance tax would also continue to 
be imposed where the partnership itself sold or otherwise transferred 
the property in question. 

It is estimated that this proposed change will result in only a very 
small revenue loss, 

2. Payment of transfer taxes through a national securities exchange 
by check. — Regulations 71 issued in 1943 provide that a member of a 
national securities exchange can appoint the clearinghouse of the 
exchange as his agent for purpose of affixing the stamps required 
on his stock and bond transactions. The member-broker is required 
to file a daily report with the clearinghouse showing the total tax 
payable on all of his transactions (whether or not through such 
exchange). He also must maintain detailed books of all of his 
stock transactions showing the tax payable. The clearinghouse, how- 
ever, purchases and affixes to a summary sheet covering all of the 
reports it receives from brokers sufficient stamps to cover all of the 
transactions for the reporting brokers. The broker indicates by a 
stamped endorsement on the stock certificate, or accompanymg mem.o- 
randum of sale, that the transfer tax has been paid through the 
clearinghouse. Agents of the Internal Revenue Service check the 
proper payment of taxes by comparing the daily report with the 
brokers' books and the canceled stamps retained by the clearinghouse. 

While this method of tax payment in the case of national security 
exchange members has been generally approved, it still contains a 
useless step, namely, the purchase and cancellation of tax stamps. 
It has been pointed out that this method requires the daily purchase 
of stamps m large amounts, the individual cancelmg of these stamps, 
and their storage in safekeeping for several years awaiting audit. 



26 EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 

In the interest of simplifying administration and easing taxpayer 
compiiance, it is suggested that the purchases of stamps b}^ clearing- 
houses of national sccurit}^ exclianges no longer be required and 
instead that the clearinghouses be required to make daily payment 
by check to an authorized Government depository of the total amount 
of taxes shown on the broker-members' reports. A system similar 
to^this has been in effect in New York State since 1943. 

3. Exemption certificates. — Section 4344 provides that no exemp- 
tions be granted from the documentary-stamp tax in certain cases 
unless the delivery or transfer of the document qualifying for exemp- 
tion is accompanied by a certificate setting forth such facts as (lie 
Secretary or his delegate may by regulations prescribe. 

This requu'ement as to exemption certificates exists in the case of 
most, but not all, of the exemptions under the various documentary- 
stamp taxes. For example, it applies in the case of the exemptions 
for delivery of stock or certificates of indebtedness to a borrower as 
a loan of the shares or certificates (or to the lender as a return of 
the loan), to brokers (or their registered nominees) for sale or from 
brokers to their customers, and from a corporation to a registered 
nominee of the corporation (or from one nominee of a corporation 
to another). It does not, however, apply in the case of transfers 
from an executor or an administrator to a legatee, heir or trustee 
where the value of the stock is not greater than the tax that otherwise 
would have been imposed. Also, the exemption certificate require- 
ment is not applied in the case of delivery of stock or certificates of 
indebtedness to a lender as collateral security but does apply where 
the delivery or transfer is to a trustee or public officer as security 
for the performance of an obligation. 

It is suggested that the statutory requirement for exemption certif- 
icates under the documentary-stamp tax be liberalized. This will con- 
stitute a simplification as far as taxpayers are concerned since proof 
will not be required where the basis for the exemption is obvious as a 
result of the nature of the transaction. The Secretary will, however, 
under his general regulatory authority still be able to require proof 
that the taxpayer is eligible for the exemption where that appears ap- 
propriate. With the liberalization of this provision, this need not, 
even in these cases, however, take the form of an exemption certificate. 

4. Return of stock or certificates of indebtedness devositied, as collateral 
security — Section 4341 (1) provides an exemption from the documen- 
tary-stamp tax on transfers of stock or certificates of indebtedness 
which have been deposited as collateral security for money loaned 
(if the collateral security is not sold). However, this section provides 
no exemption Mhen the collateral is returned to the borrower of tlie 
money upon repayment of the loan. In this respect this provision 
difi'ers from tlie exemption provided in section 4341 (2), relating to 
deli^'ery to a trustee or public officer as a performance security, where 
a specific exemption is provided for the return of the stock or cer- 
tificate. The regulations on the collateral securit}^ provision exempt 
the return of the stock or certificates or indebtedness from the transfer 
tax when the loan is paid. 

It is suggested that the statute be amended to specificially exempt 
from the transfer tax the return of stock or certificates of indebtedness 
in such cases. This is intended to be declaratory of existing law. 



EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 27 

5. Basing the stock issuance and transfer taxes on the actual value 
rather than par value. — Section 4301 imposes a stamp tax on the orig- 
inal issue of stock. The rates mider the issuance tax are 11 cents per 
$100 (or fraction thereof) of the par or face value of the certificate (or 
shares if no certificate is issued). In the case of no par value stock, 
the tax is 11 cents on each $100 (or fraction thereof) of the actual 
value of each certificate (or shares where no certificate is issued) ex- 
cept that where the actual value is less than $100 per share, the tax 
is 3 cents on each $20 (or fraction thereof) of the actual value of each 
certificate (or share). 

Section 4321 imposes a stamp tax on the transfer of shares or cer- 
tificates of stock or stock rights. The rate in this case for par value 
stock is 6 cents on each $100 (or fraction thereof) of the par or face 
value of each certificate (or share if no certificate is transferred), or if 
the stock is sold for less than $20 per share the rate is 5 cents. In the 
case of no par value stock selling for more than $20 per share, the tax 
is 6 cents per share and for stock selling below this price the tax is 5 
cents per share. 

It is difficult to justify the imposition of either the stock transfer or 
issuance taxes on the basis of par value. Par value has no real or 
economic meaning and, in fact, is often adjusted to incur the smallest 
possible amounts of issuance and transfer taxes. Moreover, the 
present treatment wherein no par value stock is taxed on a per share 
basis (or actual value basis in the case of the issuance tax) has meant 
in general that those stocks which do not maintain the fiction of a 
par value are subject to a much heavier transfer tax than those hav- 
ing a par value, since a relatively low par value usually is taken. 

The present system which is based in large part on par value is 
undesirable because it creates distinctions between stocks on an 
artificial basis which have no relationship to the value of the stock. 
Moreover, the present arrangement tends to discriminate against 
stocks of a relatively low value since such stocks are likely to have 
at least as high a par value as higher priced stocks. The artifi "iality 
of the present par value system is illustrated in table 1 which -.hows 
the impact of the present Federal stock transfer tax during No^ .mber 
1955, on the 100 most active stocks listed on the New York Stock 
Exchange. This table for comparative purposes also shows what the 
tax would have been per share in the case of these stocks if it had 
been computed at a rate of 5 cents per $100 of market value. This 
table illustrates quite clearly that under the present tax there is no 
consistency whatever between the price of the stock and the transfer 
tax payable. 

It is suggested that the stock, transfer, and issuance taxes be 
revised as follows: 

(a) The tax on the transfer of stock or stock rights would, in general, 
be 5 cents on each $100 or major fraction thereof of the actual value 
of each certificate (or of the share where no certificate is transferred). 
The minimum tax per certificate (or per share where no certificate is 
issued), would be 5 cents per transaction. In the case of transfers 
which do not involve a sale or exchange for value, the rate would be 
5 cents per share. 

(6) In the case of the stock issuance tax, the rate would be 10 cents 
on each $100 or major fraction thereof of the actual value of each 



28 EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 

certificate (or of the shares where no certificate is issued). The 
minimum tax in an}^ case would be 10 cents per certificate (or share if 
no certificate is issued). 

The transfer tax constitutes the principal source of revenue in this 
area and is the tax on which certain sampling was obtained to deter- 
mine the rate which should be imposed to maintain current revenues. 
Based upon an examination of the transfers which occurred on the 
New York Stock Exchange in November 1955, it was found that, 
based upon the then current price level, a tax of 4 cents per $100 of 
market value would result in approximately^ the same revenue col- 
lections as the present par value taxes. However, it is recognized that 
this is a period of historically high values for most stocks, and for that 
reason it is believed necessary to impose a rate of 5 cents per $100 of 
actual value if current revenues from these taxes are to be maintained . 
The rate of 10 cents per $100 of actual value in the case of the stock 
issuance tax maintains approximately the same relationship between 
this tax and the transfer tax as exists at present. 

Table 1. — Ivipact of Federal stock transfer taxes on 100 most active stocks listed on 
the New York Stock Exchange, November 1955 



Issue 



Average 
price 



Par value 




Federal stock transfer tax 
per 100 shares 



Benguet Consolidated Mining 

Graham-Paige Corp 

Electrical & Musical Industry. 

Avco Manufacturing Corp._ 

Rhodesian Selection Trust 

Alleghany Corp 

Studebaker-Packard 

Panhandle Oil Corp - 

Wilson & Co 

FairchUd Engine & Airplane 

Baldwin-Lima-Hamilton 

Braniff Airways 

Libby-McNeOl-Libby 

Lehigh Coal & Navigation., 

J. I. Case 

Armour & Co 

Columbia Gas System 

Burlington Industries 

Rayc''iC'on Manufacturing 

Pan-American World Airways - 

Penn-Tcxas Corp., 

Southern Co 

United Merchants & Manufacturers. 

Celanese Corp 

National Distillers 

Loew's 

Budd Co.. 

Western Union 

Pepsi-Cola 

National Container 

Chicago Corp 

Sperry-Rand Corp. . 

American Airlines 

Sunray-Mid-Contincnt 

Merritt-Chapman & Scott . 

Merck A- Co 

Chicago, Milwaukee, St. Paul 

Pennsylvania RR 

Curtiss- Wright Corp 

International Telephone & Telegraph 

TXL Oil Corp- 

Monterey Oil Co 

International Minerals 

Fairbanks, Morse & Co 



$1.38 
1.94 
3.56 
5.94 
6.63 
8.75 
10.38 
12.56 
13.13 
13.38 
14.13 
14.56 
14.69 
14.88 
15.06 
15.44 
16. 06 
16.69 
16.69 
17.63 
19.00 
19.19 
19. 6.'^ 
19.88 
20.06 
20.38 
20.81 
21.44 

22. 56 

23. 25 
23. 38 
23. 38 
23. 44 
23. 63 
23.75 
24.13 
25.63 
25.88 
27.63 
28.06 
28.38 
29.69 
30.13 
30.94 



No 

3 

Mo 

1 

10 

1 

No 

1 

13 

m 

7 
10 

5 
No 
100 

5 

1 
10 

5 

1 
No 

5 
No 

5 

2^ 

1 
1 

Vi 
1 
1 

12^^ 

No 
50 

1 
No 

1 

1 

5 
No 



$0.45 

5.00 
.07 
.15 
.035 
.05 
.50 
.05 

5.00 
.05 
.65 
.125 
.35 
.50 
.625 
.25 

5.00 

5.00 
.25 
.05 
.60 
.25 
.05 

5,00 
.30 

6.00 
.30 
.15 
.02 
.06 
.06 
.03 
.06 
.06 
.75 
.01 

6.00 

3.00 
.06 

6.00 
.06 
.06 
.30 

6.00 



$0.05 

.10 

.20 

.30 

.35 

.45 

.50 

.65 

.65 

.65 

.70 

.75 

.76 

.75 

.75 

.76 

.80 

.85 

.85 

.90 

.95 

.95 

1.00 

1.00 

1.00 

1.00 

1.05 

1.05 

1.15 

1.15 

1.15 

1.15 

1.15 

1.20 

1.20 

1.20 

1.30 

1.30 

1.40 

1.40 

1.40 

1.60 

1.50 

1.55 



EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 29 

Table 1. — Impact of Federal stock transfer taxes on 100 most active stocks listed on 
the New York Stock Exchange, November 1955 — Continued 



Issue 



price 



Par value 



Federal stock transfer tax 
per 100 shares 



Actual tax 



Tax if com- 
puted at 
5 cents per 
$100 of mar- 
ket value 



United Dye & Chemical 

Colorado Fuel & Iron 

Glenn L. Martm 

Canadian Pacific Ry 

Niagara Mohawk Power 

Ohio Oil Co 

Chance Vought Aircraft 

Texas Pacific Coal & Oil 

Pittston Co 

International Harvester 

Atlantic Refining 

Texas Gulf Sulphur 

;Sears, Roebuck (new) 

'Texas Gulf Producing 

Sobering Corp 

Commonwealth Edison 

New York Central RR 

Republic Aviation 

Radio Corp 

Monsanto Chemical 

United States Rubber Co 

Baltimore & Ohio RR 

•General Motors (when issued) 

^Republic Steel 

JVrmco Steel Corp 

■General Electric Co 

^Standard Oil Co (Indiana) 

Lockheed Aircraft 

rSafeway Stores 

Fruehauf Trailer Co 

Reynolds Metals Co 

•Olin-Mathieson Chemical 

^Sinclair Oil Corp 

United States Steel Corp 

Westinghouse E lectric 

;Southern Pacific 

American Cyanamid 

■General Dynamics 

"Warren Petroleum 

Boeing Airplane 

American Viscose (regular) 

Anaconda Co 

North American Aviation 

Northern Pacific 

PhOlips Petroleum 

Royal Dutch Petroleum 

Gulf Oil (regular) 

Amerada Petroleum 

Chrysler Corp 

Montgomery Ward & Co 

Sears, Roebuck (old) 

Kennecott Copper 

Standard Oil (New Jersey) 

Bethlehem Steel 

American Telephone & Telegraph- 
E. I. du Pont.. 



$31. 00 
31.13 
31.94 
32.38 
32.50 
33.19 
30.06 
35.13 
35.25 
36.00 
36.31 
37.75 
38.81 
40.00 
40.63 
41.38 
44.44 
44.81 
44.94 
45.13 
45.69 
46.81 
49.25 
49.50 
50.00 
50.25 
50.44 
50.56 
51.31 
51.38 
51.38 
56.19 
56.44 
56.44 
56.81 
58.00 
58.31 
60.38 
60.50 
66.31 
66.38 
69.38 
69.69 
72.81 
79.69 
81.13 
84.31 
90.44 
96.88 
98.38 
112. 75 
115. 50 
140. 81 
153.75 
180. 50 
231. 38 



No 

1 

25 

No 

No 

1 

10 

1 

No 

10 

No 

3 

25 
No 

1 
No 

2 

5 
100 

m 

10 
10 

5 
25 

1 

5 

1 
No 

5 

5 

16?^ 

12^i 

No 

10 

3 

3 

5 
25 
50 

1 

No 

No 
13 
25 

No 
25 

No 

No 

No 
15 

No 
100 

5 



$0.06 

6.00 

.06 

1.50 

6.00 

6.00 

.06 

.60 

.06 

6.00 

.60 

6.00 

.18 

.20 

.009 

1.50 

6.00 

.06 

6.00 

.12 

.30 

6.00 

.10 

.60 

.60 

.30 

1.50 

.06 

.30 

.06 

6.00 

.30 

.30 

1.00 

.75 

6.00 

.60 

.18 

.18 

.30 

1.50 

3.00 

.06 

6.00 

6.00 

.78 

1.50 

6.00 

1.50 

6.00 

6.00 

6.00 

.90 

6.00 

6.00 

.30 



$1.55 
1.55 
1.60 
1.60 
1.60 
1.65 
1.75 
1.75 
1.75 
1.80 
1.80 
1.90 
1.95 
2.00 
2.05 
2.05 
2.20 
2.25 
2.25 
2.25 
2.30 
2.36 
2.45 
2.45 
2.50 
2.50 
2.50 
2.55 
2.55 
2.55 
2.55 
2.80 
2.80 
2.80 
2.85 
2.90 
2.90 
3.00 
3.00 
3.30 
3.30 
3.45 
3.50 
3.65 
4.00 
4.05 
4.20 
4.50 
4.85 
4.90 
5.65 
5.75 
7.05 
7.70 
9.00 

11.55 



6. Deiinition oj certificates oj indebtedness . — Section 4311 of the code 
imposes a documentary stamp tax on all certificates of indebtedness 
issued by a corporation. As defined in section 4381, the term "cer- 
tificates of indebtedness" means bonds and debentures; and also 
includes all instruments, however termed, issued by a corporation 
with interest coupons or in registered form, known generally as cor- 
porate securities. The tax on certificates of indebtedness has remained 
essentially the same since the Revenue Act of 1924. Prior to that 
time a tax at a lower rate was also imposed on promissory notes. 



30 EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 

The Revenue Act of 1924 removed promissory notes from the 
scope of the tax. The tax continued to be imposed on instruments 
which were styled bonds, debentures, certificates of indebtedness, and 
such other instruments which had attached thereto interest coupons 
or were in registered form. Under Treasury regulations the imposition 
of the tax did not depend upon the name by which the instrument 
was called. 

After 1929 corporations began borrowing large sums on long-term 
notes for capital financing. These notes were issued to private 
investors, such as banks and insurance companies, and contained 
provisions restricting fm'ther borrowing, the payment of dividends, 
and so forth. 

In 1935 the General Motors Acceptance Corp. borrowed $25 mDlion 
from 8 corporations, issuing 84 unsecured instruments, called notes, 
as evidence of the indebtedness. The notes were issued in series, 
but did not bear interest coupons and were not in registered form. 
Otherwise they resembled conventional corporate securities and their 
terms embodied the usual restrictive conditions associated with 
corporate certificates of indebtedness. In the case of General Aloiors 
Acceptance Corporation v. Higgins, (161 F. (2d) 593, cert, denied, 
332 U. S. 810) the Court held that the promissory notes involved were 
debentures and, accordingly, taxable on issuance as such. Since that 
time there have been approximately 20 decisions handed down by 
the courts on this subject, with the decisions being fairly evenly 
divided as to the taxability of the instrument in question. In the 
case of Leslie Salt Company v. L. S. (110 Fed. Supp. 680, aff'd, 218 F. 
(2d) 91, cert, granted June 6, 1955) it was decided that two long-term 
nonnegotiable promissory notes in the amounts of $1 million and $3 
million were not debentures and, therefore, were not taxable upon 
issuance. The appeal in the Leslie Salt case has been heard during^ 
the current term of the Supreme Court, but a decision has not yet 
been rendered. 

In order to eliminate the possibility of tax avoidance in this area 
and to eliminate confusion, which has resulted in considerable litiga- 
tion, it is suggested that the law be amended to specify that long- 
term promissory notes are subject to the tax imposed on the issuance 
of certificates of indebtedness by corporations. The imposition of the 
tax should be limited to long-term notes. It is not intended that a 
tax should be imposed on the ordinary short-term promissory notes. 

7. Transfers of worthless certificates of indebtedness. — Section 4322 
(a) (4) exempts from the stock transfer, imposed by section 4321, tax 
transfers by an executor or administrator to a legatee, heir, or dis- 
tributee if it can be shown that the value of the stock transferred is 
not greater than the amount of the tax which otherwise would be 
imposed on the delivery or transfer. 

It is suggested that the same exemption be made available where an 
executor or administrator transfers certificates of indebtedness to a 
legatee, heir, or distributee and the value of the certificates is not 
greater than the amount of the tax involved. Such treatment appears 
desirable to accord consistent treatment in the case of stock and 
certificates of indebtedness and also on the grounds that the tax should 
not wipe out the amount of the legacy, bequest, or distribution. 

It is estimated that this would result in a very small revenue loss» 



EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 31 

B. Agreement in 'principle 

1 . Tax on issuance of stock when earned surplus is dedicated to capital 
account. — Since the Revenue Act of 1932, the Internal Revenue Serv- 
ice has considered the issuance of certificates to be unnecessary for the 
imposition of the stamp tax on the issuance of stock. Prior to the 
Revenue Act of 1932 the tax was imposed on each original issue of 
certificates of stock. The Revenue Act of 1932 added the parenthet- 
ical phrase "or of the shares where no certificates were issued." Sec- 
tion 1802 (a) of the 1939 code was amended in 1947 to provide that in 
recapitalizations, where certificates are issued or shares where no certif- 
icates are issued, the tax is to be imposed only on the increase in the 
value of the new stock resulting from the addition to capital under 
the recapitalization. 

The Service has construed the language in the 1939 code as meaning 
that taxable shares are created upon the dedication of new capital to 
outstanding shares, that is, the mere transfer of surplus or other capital 
not previously credited to the capital-stock account, results in the 
issuance of ''shares" and will be taxable under the 1939 code and the 
corresponding section of the 1954 code. 

This issue was involved in two court cases, namely. United States v. 
National Sugar Refining Co. (113 Fed. Supp. 157), United States Dis- 
trict Court for the Southern District of New York, and F <& M 
Schaefer Brewing Co. v. United States, unreported from the United 
States District Court for the Eastern District of New York, both of 
which cases were decided against the Government. These cases in- 
volved the increase of the stated value of no-par-value stock. 

The Service's interpretation of the law appears correct in view of 
the background of its enactment. However, the law seems to be 
unreasonable in its effect. There is no issuance of stock in the situa- 
tion under consideration. Furthermore, a transfer of surplus to 
capital account gives no real enhancement in the actual value of 
outstanding stock, since the assets already belonged to the company 
and its stockholders. 

The Treasury Department, therefore, agrees that as a matter of 
principle, no issuance tax should be asserted on the mere dedication 
of earned surplus to capital. Specific mention is made of ''earned 
surplus" because of the need to prevent possible avoidance of tax 
on the issuance of par-value stock for paid-in capital and surplus by 
designating most of the funds paid in as surplus and then dedicating 
the surplus to capital later on. Possible revenue losses from enact- 
ment of this change, however, prevents the Treasury Department 
from endorsing an actual change at this time. 

2. Statutory mergers and consolidations. — Section 4301 of the 
Internal Revenue Code of 1954 imposes a documentary-stamp tax 
on each original issue of shares or certificates of stock issued by 
corporations, whether on organization or reorganization. Section 
4321 imposes a documentary-stamp tax on each sale or transfer of 
shares or certificates of stock or of rights to subscribe for or to receive 
such shares or certificates of stock. 

By the terms of the statutory language employed in the two sections, 
which is the same as that used in the 1939 code, the tax on the original 
issue of stock is separate and distinct from the tax on the transfer of 
stock or the right to receive it. For that reason, the Treasury De- 
partment has taken the position and has been sustained by the 



32 EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 

courts under the provisions of the 1939 code in hokling that where 
one corporation is merged into another and as a residt shares of the 
acquuing corporation are issued directly to the shareholders of the 
component corporation, documentary stamps are to be affixed upon 
both the issuance of the shares by the acquiring corporation and 
upon the transfer to the shareholders of the component corporation 
of the right to receive the shares of the acquiring corporation (e. g., 
American Processing cfc Sales Company v. Campbell 164 F. 2d 918 
(C. C. A. 7, 1948) cei-t. denied 333 U. S. 844; U. S. Industrial Chemicals, 
Inc. V. Johnson, 181 F. 2d 413 (C. C. A. 2, 1950)). 

In most instances the existence of the component corporation 
vanishes to all intents and purposes as soon as its assets are transferred 
to the acquiring corporation. If the component corporation remains 
in existence at all, it exists as a mere shell. For that reason, it is 
suggested in the case of statutory mergers that only the tax imposed by 
section 4301 on the issuance of shares or certificates of stock be made 
applicable. However, the proposal is limited to cases where the 
stock or certificates of stock are issued directly by the acquiring cor- 
poration to the security holders of the component corporation. 

The suggestion that only one tax be imposed upon the issuance of 
the shares or certificates of stock of the acquiring corporation is 
predicated upon a belief that as a matter of reason there is no occasion 
to impose a transfer tax in addition to the higher tax imposed on the 
issuance of the shares or certificates of stock by the acquiring 
corporation. 

The foregoing discussion and proposal apply with equal force and 
merit to the case of statutory consolidations with respect to which 
the Internal Revenue Service has taken the same position (M. T. 3., 
2 C. B. 257 (1942)). Accordingly, the proposal with respect to 
mergers should be understood to apply also to statutory consolidations. 

The Treasury Department agrees in principle with this suggestion 
but because of the revenue loss that would be involved does not 
believe that current action is desirable. 

3. Odd-lot transactions. — At the present time when an individual 
desires to sell less than 100 shares of listed stock (or the unit of trading 
on an exchange), he sells them to a so-called odd-lot dealer on the 
exchange paying the ordinary stock-transfer tax. The dealer cus- 
tomarily will then sell 100 shares on the market representing an 
aggregation of two or more odd lots which he has purchased again 
paying a transfer tax. Both of these taxes customarily are borne by 
the odd-lot customer. Thus, an individual owning less than 100 
shares of a stock pays a double transfer tax. 

It is believed that this is discriminatory treatment for the small 
stockholder, and it is agreed in principle that it would be desirable to 
remove this double tax. However, the Treasury Department is not 
in a position to m.ake such a recommendation at the present time in 
view of the fact that the elimination of this double tax would probably 
involve a revenue loss of approximately $1 million a 3^ear. 

VI. WAGERING TAX AND TAXES ON COIN-OPERATED MACHINES 

A. Full agreement 

1. Liability of "runners" for the tax on wagers. — An excise tax on 
wagers equal to 10 percent of the amount thereof is imposed by section 



EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 33: 

4401. The tax is imposed on "each person who is engaged in the busi- 
ness of accepting wagers." A person is considered to be in the busi- 
ness of accepting wagers if he is engaged as a principal who, in accept- 
ing wagers, does so on his own account, or if he makes it a practice 
to accept wagers with respect to which he assumes the risk of profit or 
loss. 

In view of this interpretation of the law, administrative difficulties 
have been experienced in cases in which the so-called ''runner" of a 
gambling group has been apprehended. The "runner" is the person 
who accepts wagers from players and also pays off wagers to players 
but does not assume the risk of profit or loss. Often the runner re- 
fuses or is unable to name the person for whom he is accepting wagers. 
In this type of case, the "runner" is subject only to the occupational 
tax of $50 (sec. 4411) and all efforts to impose the excise tax of 10 per- 
cent under section 4401 must be abandoned. 

If the policy under which the Service now operates continues, ihe^ 
ultimate result may be that all persons supposed to be covered by 
the wagering tax will contend that they are "runners" or "agents" of 
persons unknown for whom they are "accepting wagers." Thus, the 
10 percent excise tax will rarely be applied. 

It is therefore suggested that section 4401 or 4411 be amended sa 
that an agent who refuses or is unable to name his principal shall be 
deemed prima facie the principal for the purposes of the excise tax. 
This is consistent with the general principles of the law of agency. 
In any case the Service should be permitted to proceed against the 
agent in such a way that he will be required to at least name the 
person to whom he pays the amounts collected by him as wagers or 
if he refuses or is unable to do so, then he (the agent) will be con- 
sidered the principal agent whom the 10 percent excise tax imposed 
under section 4401 will be asserted. 

2. Coin-operated amusement devices actuated by remote control. — A 
special annual tax is required to be paid by every person who main- 
tains for use or permits the use of, on any place or premises occupied 
by him, a coin-operated amusement or gaming device defined in 
section 4462 (a) (1) and (2) respectively. Section 4462 (a) (1) defines 
the term "coin-operated amusement device" to mean any amusement 
or music machine operated by means of the insertion of a coin, token, 
or similar object. 

In recent years there has been introduced a type of amusement 
device which is of the taxable type but which is actuated by some 
method of remote control which permits the machine to be operated 
without the insertion of a coin, token, and so forth. There are several 
methods of remote control which are so used. For example, a drug- 
store maintains three amusement devices. A person who desires to 
operate any one of these devices informs the clerk who after receiving 
payment from the player activates the machine for use by the "throw- 
ing" of a key available to the clerk. Since these machines are not 
operated by the insertion of a coin, token, and so forth, they are not 
subject to tax and thus present an area of tax avoidance. 

It is suggested that section 4462 be amended so that the definition 
contained therein of a coin-operated amusement device will include 
the type of machine described above. 



PART 2: EXEMPTION AND REFUND PROCEDURES 

I. MAJOR EXEMPTION AND REFUND OR CREDIT PROVISIONS 

The principal exemptions under the manufacturers' excise taxes are 
those for futher manufactm-e, for export, for sales to State and local 
governments, for supplies for vessels and airplanes, and for certain 
foreign diplomats. Some of these exemptions also are available in 
the case of the retail excises and the taxes on communications and 
tiansportation. Different methods of exemption and refund or credit 
are available for the different sorts of purchasers. It is suggested 
that a more uniform system of exemptions and refunds or credits be 
established for manufacturers' sales (or resales) for further manu- 
facture, for export, to State and local governments and for fuel 
supplies, etc., for certain vessels and aircraft. The same rules would 
also apply in the case of sales for export in the case of the retail taxes, 
and to sales to State and local governments in the case of both the 
retail taxes and the taxes on communications and transportation. 

It is also suggested that the exemption and refund or credit pro- 
cedure outlined below be applied in the case of the special exemptions 
presently provided by law, which in reality represent a form of exemp- 
tion for further manufacture. These would include the exemption 
for lubricating oils sold to a manufacturer of lubricating oils for resale 
by him (sec. 4093), the exemption for sales of gasoline to a producer 
of gasoline (sec. 4083) and the exemption for auto or truck bodies 
or parts or accessories sold to a manufacturer of trucks or automobiles 
(sec. 4063). 

A. A possible system in general terms 

The system outlined here contains two alternative methods for 
obtaining articles free of tax: one would provide for tax-free sales all 
the way through the chain of production and distribution; the other 
would provide refunds or credits for articles sold on a tax-paid basis 
but which were subsequently freed of tax as a result of use for one of 
the specified purposes such as further manufacture, sale for export, 
sale to a State or local government, or sale for fuel supplies, etc., for 
certain vessels or aircraft. 

Tax-free purchases would be permitted initially if the vendee indi- 
cated at the time of the sale that he intended to use or resell the 
article for any of the specified purposes. Tax-free purchases for 
resale, however, would be limited to those where only one dealer 
intervened between the initial manufacturer and the purchaser who 
uses the article, for further manufacture, exports it, is a State or 
local governmental unit, or is a person purchasing tax free for the 
specified types of vessels or aircraft. 

Certain exceptions to the above general rules would be made, 
however, in the case of tires, inner tubes, and automobile radio and 
television sets because of the relationships of the taxes on these 
articles to those on automobiles and trucks. As at present, tax-free 

84 



EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 35 

purchases for these articles for further manufacture would not be 
allowed, although where such articles are incorporated in automobiles 
or trucks a credit would be allowed against the auto or truck tax 
equal to the price paid for the tire, inner tube, auto radio, or television 
set multiplied by the tax rate on autos or trucks. Tax-free purchase 
of these articles would be allowed, however, for export, for sale to 
State or local governmental units, and for supplies, etc., for certain 
vessels and aircraft. 

B. Tax-free purchases 

To obtain an article free of tax from a manufacturer, a purchaser 
would have to indicate that the article was to be used or sold for one 
of the specifically exempt purposes (with the exception noted above 
for tires, inner tubes, and auto radios and television sets).* This 
differs from present procedures in that sales for manufacture, for 
export, to State or local governmental units, or for supplies for 
vessels or aircraft would no longer constitute separate categories. 
A purchaser need only indicate that he intends to use or resell the 
article for any of these purposes. He would also be required to 
provide proof that the article was used or sold for one of these purposes 
within 6 months of his purchase (i. e., from the date of the transfer 
of title or shipment, whichever occurred first). Where the proof is 
not obtained within the 6 months' period, the initial manufacturer 
would become taxable with respect to the sale. If subsequently the 
purchaser should use or resell the article for any of the specifically 
exempt purposes, a refund or credit could be obtained in the same 
manner as indicated below in the case of purchases initially made on a 
taxpaid basis. 

As under present law, one exception would be made to this presenta- 
tion of proof within 6 months, i. e., where the purchaser is himself a 
m.anufacturer. This exception would be provided for manufacturers 
because they may frequently hold the articles as inventory for ex- 
tended periods of time. Also, in the case of sales to manufacturers, 
it is possible to hold them responsible for the payment of the tax, 
should they subsequently sell it for a taxable purpose, in the same 
manner as the initial manufacturer. The tax base in this case could 
be the purchase price of the vendee-manufacturer, or at the option of 
the vendee-manufacturer the sales price of the original manufacturer 
if he is in a position to provide proof of the amount of such price. 
The two bases would differ only where there were intervening dealers. 

As applied under present law, the system described above provides 
that no manufacturer would be required to make tax-free sales for 
any of the prescribed purposes (except where the sale was made 
directly to a State or local governmental unit). Thus, vendor- 
manufacturers would not be required to accept responsibility for the 
payment of any tax ultimately determined to be due in those cases 
where they might have reason to question the likelihood of the ultimate 
collection. 

The recommended tax treatment outlined above for tax-free sales is 
substantially the system already in use in the case of sales for further 
manufacture and sales for export. However, the proposal would for 
the first time provide that sales could be made tax free for resale to a 

* The system outlined here would apply to retail taxes to the extent the exemptions are applicable, but the 
present exemption requirements would be kept for the State and local government exemption with respect 
to the taxes on communications and transportation. 



36 EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 

State or local govermnontal unit or for resale as supplies for vessels or 
airplanes. Tliis presently cannot bo done even where it is known at the 
time of the sale that the article vill be resold for such a purpose. The 
present system in this respect appears unnecessarily cumbersome in 
requiring the collection of a tax where it is known that eventualh' no 
tax will be due. Moreover, the distinction in the present system, if it 
were to be continued, would prevent the adoption of a single compre- 
hensive exemption and refund system for all major exemptions. 

C. Registration in lieu of exemption certificates 

Under present law the exemptions provided b}- section 4220 with 
respect to sales or resales for fin-ther manufacture are conditioned 
upon the compliance with regulations prescribed by the Secretary or 
his delegate. Under this authority a registry and exemption system 
has been set up. The regulations provide that no otherwise taxable 
article may be sold tax free unless the vendor and vendee have each 
registered with the local district director of internal revenue. Each 
person qualifying is given a registration certificate containing a regis- 
tration number. The Commissioner is authorized to cancel the 
registration certificate where he is satisfied that the registrant is not a 
bona fide manufacturer of taxable articles or a vendee making resales 
directly to such manufacturers, or where the tax-free sales are being 
made for purposes not warranted by the law and the regulations. 

In order to establish the right to exemption the registered vendor 
must obtain from his registered vendee prior to, or at the time of the 
sale (and retain in his possession) a so-called exemption certificate 
showing that the vendee is a manufacturer of taxable articles and that 
the article purchased is to be used by him as material in, or a com- 
ponent part of, another taxable article. An exemption certificate 
may be furnished for each sale, or one certificate may be provided 
covermg all orders over any period of time not in excess of 1 month. 

Registration is not provided for in the case of sales for export, 
sales to State and local governmental units, or sales for supplies for 
vessels or aircraft, although exemption certificates are required in the 
two latter cases. 

Under the suggestion outlined here the registration procedure 
presently in use in the case of sales for further manufacture would 
be retained and also applied in the case of sales for export, to State 
or local governmental units, and for sales for supplies for vessels 
and aircraft. It is recommended that provision be made for the 
permanent registration of purchasers for any of the exempt purposes 
and that tax-free sales be made only to such purchasers. Thus, only 
once would there generally need be a showing of use or sales of the 
prescribed type. However, the Internal Revenue Service could be 
given the power to require a showing from time to time that tax-free 
sales are still being made and also the power to deny further regis- 
tration for a period of time in abuse cases. 

Under this system, exemption certificates would no longer be 
required. Sufficient proof of a tax-exempt sale would be evidenced 
by a notation on the sales order or purchase order of the registration 
number of the exempt purchaser. The use of the registration number 
on a sales order would constitute an acknowledgment on the part of 
the purchaser that he was buying the articles for an exempt purpose. 
The willful misuse of such registration number would make the vendee 



EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 37 

subject to criminal penalties. It should be noted that under present 
law the notation on a sales invoice, or at least the association of the 
sales invoice with the exemption certificate, is required in addition to 
the use of a certificate so that the retention of the notation on the 
sales invoice represents no new requirement. On the other hand, the 
elimination of exemption certificates should represent a substantial 
administrative simplification. 

On an optional basis. State and local governmental units should 
be permitted to use exemption certificates to make tax-free purchases 
instead of using the registration procedure. 

D. Procedure for refunds or credits 

It is suggested that where a sale is made by the initial manufacturer 
on a taxpaid basis and the purchaser subsequently uses or sells the 
article for one of the prescribed exempt purposes, a refund or credit 
be allowed upon proof of such a sale.^ The refund or credit would 
be allowed whether or not there had been an indication at the time of 
the initial purchase that the article was intended for use for one of the 
specified exempt purposes. This same refund or credit device would 
also be available in those cases where a sale was initially made on a 
tax-free basis but, because use or resale for an exempt purpose was not 
shown within a 6-month period, tax was subsequently paid. Such 
cases from the standpoint of refunds or credits would be treated in 
the same manner as if the articles originally had been purchased on a 
taxpaid basis. 

It is suggested that the refund or credit be made through the initial 
manufacturer even where the sale is made to another manufacturer 
who did not have to meet the 6-month proof requirement.^ Thus, 
where a dealer exported a quantity of tax-paid items he could do so 
on a tax-free basis and present a claim for a refund or credit to his 
vendor, who in turn would present the claim to the initial manu- 
facturer. The initial manufacturer before or after having received the 
refund or credit from the Government (depending on the arrangement 
between the parties) would then pass the benefit on down through to 
the exporter. Where more than one dealer intervenes in the distribu- 
tion process between the initial manufacturer and the ultimate sale 
for one of the specified exempt purposes, this refund or credit route 
would be the only means available for obtaining relief from tax. 

The refund or credit route described above is already available in 
the case of sales to State or local governmental units, and in the case 
of sales for supplies for certain vessels or airplanes. A refund or 
credit is now also available in the case of sales for further manufacture 
but a manufacturer to whom such a sale has been made (but not a 
dealer who planned to sell to such a manufacturer) , obtains the refund 
or credit directly instead of through the original manufacturer. A 
refund or credit is presently available in the case of sales for export 
only where there was knowledge at the time of the original sale that 
the article was being purchased for export. Not only is the uniform 
treatment for the various major exemptions desirable, but also the 

' As previously suggested, a special credit would be allowed for tires, inner tubes, auto radios, and auto 
television sets iiacorporated in automobiles or trucks and the general refund or credit in the case of sales for 
further manufacture would not be available in the case of these articles. 

^ Going back to the vendor-manufacturer in the case of refunds or credits involving vendee-manufacturers 
appears necessary since the articles may have been sold on a tax-paid basis through dealers to the vendee- 
manufacturer and it may be impossible to determine the price on which the tax was paid except by tracing 
the transaction back in this manner. This would not apply, however, to the special credit in the case of 
tires, inner tubes, auto radios, and auto television sets. 



38 EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 

deletion of the advance knowledge requirement in the case of exports 
will remove a hardship on which a considerable volume of complaint 
has been received with respect to dealers who export important quanti- 
ties of goods but do not know, at the time they make their purchases, 
that the sales will be made abroad. Problems of this type have been 
especially pressing in the case of the tax on lubricatmg oil. 

E. Accounting methods jor refunds or credits 

At present the regulations generall}'' require a claim for credit or 
refund to be supported by evidence showing the name and address of 
the person who paid the tax, the date of the payment, the amount of 
the tax, and that the article was used for a tax-free purpose. Specific 
identification of each product becomes very difficult where a person 
has obtained large quantities of substantially the same type of product 
from different manufacturers. In such cases it becomes virtually 
impossible to determine from which of several manufacturers specific 
products were purchased. 

To overcome this problem it is suggested that persons be permitted 
to employ a first-in, first-out method for identifying purchases from 
various manufacturers as a substitute for the specific identification 
required by the present regulations. This should substantially ease 
compliance problems in connection with the present credit and refund 
provisions. Moreover, it is believed that it will more nearly conform 
with what in reality constitutes present practice than do the present 
regulations. 

II. SPECIAL EXEMPTION OR REFUND PROBLEMS 

A. Areas of double taxation or faulty applications of exemptions 

1. Problems with respect to tires and inner tubes, and automobile radios 
and television sets. — Section 4220 provides an exemption from manu- 
factures' excise tax for articles sold, or resold, for further manufacture. 
The third sentence in this section specifically makes this provision 
inapplicable in the case of tires, inner tubes, and automobile radio or 
television receiving sets. Similar treatment is provided in the case 
of credits or refunds. Section 6416 (b) (3) provides a refund or credit 
for articles on which a manufacturers' excise tax has been paid which 
are used, or resold, for further manufacture. However, this provision 
by its terms does not apply in the case of the taxes on tires and inner 
tubes, and automobile radio and television sets. Instead of allowing 
either tax-free sales or the ordinary refunds or credits with respect to 
these articles, a special crediting device has been provided by section 
6416 (c). The credit is available only where these articles are sold 
on or in connection with the sale of an automobile, truck, etc., taxable 
under section 4061 (a). The credit to be allowed against the auto- 
mobile or truck tax is to equal an amount determined by multiplying 
the appropriate tax rate applicable to automobiles or trucks (presently 
10 percent or 8 percent) by the manufacturer's purchase price for the 
tires and tubes or automobile radio or television receiving set. 

This special crediting device is used because the taxes on tires, 
tubes, radios, and television sets generally have been different than 
and generally higher than the taxes on automobiles and trucks. 
Thus, to allow tax-free purchases of these articles for incorporation 
in an automobile or truck would have meant that the articles used 



EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 39 

in this manner would have been taxable at a different net rate than 
similar articles not added to new cars or trucks. 

The present crediting device for tires, tubes, and automobile radio 
and television sets has created a number of problems. One of them 
arises from the fact that the credit in the case of tires and tubes is 
limited to those mounted on automobiles or trucks. The credit is not 
available where the tire or tube is mounted on what is classified as an 
automotive part or accessory, as is true in the case of so-called trailer 

dolHes. . ^ „ - 

A similar problem has arisen m the case of power lawnmowers 
having pneumatic tires (as distinguished from sohd or hollow center 
small tires of all rubber construction) and tubes. In this case, also, 
a poundage tax is first imposed on the pneumatic tire and tube and 
then the 5 percent electric, gas, and oil apphance tax is imposed 
upon the entire power lawn mower, including the tires and tubes. 

A related problem also arises with respect to this credit in cases 
where these articles are sold for use as component parts of automobiles 
or trucks which themselves are free of tax because they are exported, 
or because they are sold to a State or local governmental unit. Since 
section 6416 (c) of present law allows a credit only against the tax on 
automobiles or trucks with respect to the purchase price of the tire, 
tube, or auto radio or television set, it would appear that if no tax 
is imposed upon the automobile or truck, no credit could be claimed 
with respect to the tax on tires, tubes, or auto radio or television sets. 
On the other hand, however, sections 4224 and 4225 in the case of 
manufacturers' excise taxes (and the corresponding sections m the 
other excise taxes) provide specifically for the exemption of articles 
sold for the exclusive use of a State or local governmental unit or for 
export or shipment to a possession. 

When tires are mounted on an automobile which is exported the 
Internal Revenue Service has held that the manufacturer is- entitled 
to receive a credit or refund not only for the tax paid with respect to 
the automobile, but also with respect to the tax paid on the tires and 
tubes. In some instances automobile manufacturers have even been 
permitted initially to purchase the tires and tubes tax free where the 
automobile was to be exported. On the other hand, in the case of 
tires mounted on cars sold to States or local governments, the regu- 
lations preclude the allowance of a refund or credit for the tire or 
tube taxes. The Service beheves that its position with respect to 
the State and municipal exemption is correct and that its position 
with respect to exports is wrong. Nevertheless, the present treat- 
ment for exports is being continued, since the ruling in this case has 
been in effect for some 21 or 22 years. In the absence of a change in 
the law or a court decision, it is felt that the Service should not 
reverse a position held this long, 

2. Suggestions with respect to the credit for tires, tubes, and auto radio 
and television sets. — To prevent a double tax, tires, tubes, auto radios, 
and auto television sets would have to be free of tax when sold on 
or in connection with other articles subject to a manufacturers' excise 
tax (or eligible for a refund or credit when sold on a tax-paid basis). 
The relief could be provided by expanding the crediting device pres- 
ently provided in section 6416 (c) in the case of the excise tax on 
automobiles and trucks to allow a credit, with respect to taxes on 



40 EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 

the specified articles, against any maimfacturer's tax in the manner 
now provided in tlie case of the tax on automobiles or trucks. 

The above suggestion would continue the tax with respect to tires, 
tubes, auto radios and auto television sets when sold on or in connec- 
tion with other articles which are not subject to manufacturers' excise 
tax. In this respect these articles are (and would be) treated less 
favorably than auto parts and accessories, radio and television com- 
ponents, refrigerator components, and camera lenses. 1 hese latter 
items not only are free of tax if incorporated in another article subject 
to a manufacturers' excise tax, but also are free of tax if incorporated 
in another article not subject to manufacturers' tax. This difference 
in treatment between these parts or components on one hand, and the 
tires, tubes, and auto radios and television sets on the other, appears to 
be justified on the grounds tliat the former are basically only com- 
ponents Avhile the latter are end articles in and of tliemsolves. 

With respect to tires, tubes, and auto radios and television sets 
incorporated in, or sold in connection with, articles (such as auto- 
mobilies or trucks, but not limited to these items) which are sold for 
export or sold to State or local governmental units, it would be 
desirable to allow tax-free sales (or credits or refunds) in the same man- 
ner as for other articles sold for export or to State or local governmental 
units. This would remove the present inconsistent treatment be- 
tween exports and sales to governmental units, and would tax the 
articles in the same manner as other manufacturers' excises where the 
articles are ultimately exported or sold to a governmental unit. 

3. Problems arising where clocks are combined with other articles. — 
Where clocks have been combined with other items subject to a manu- 
facturers' excise tax, the Service has followed the practice of taxmg 
the entire combination at the manufacturers' level. This has been 
true, for example, in the case of clock radios. Also, in the case of 
auto clocks the manufacturers' auto part and accessory tax has been 
applied rather than the retail jewelry tax. In the case of auto clocks 
this treatment was accorded on the grounds that these clocks con- 
stituted automotive parts or accessories and therefore could be taxed 
under a manufacturers' tax rather than as clocks subject to the jewelry 
tax. Apparently the same rationale has been used in subjecting 
clocks combined with radios to the manufacturers' radio tax. 

Clocks combined with nontaxable items have been held subject to 
the retail tax on jewelry on the portion of the combination represent- 
ing the clock. This has been true, for example, m the case of ther- 
mostat controls combined with clocks. Wliere clock mechanisms are 
used as timing devices, but no clock face appears, the Service holds 
that no tax is presently due. 

The tax treatment accorded these clock combinations by the Serv- 
ice appears to be both a practical and rational method of taxation. 
However, there is little or no statutory authority for the miposition 
of the manufacturers' tax, rather than a retail tax, where clocks are 
combined with other items subject to the manufacturers' tax. In 
fact, under the 1954 code it could well be argued that the opposite 
effect should apply. Section 4221 provides that none of the manu- 
facturers' excise taxes are to be imposed on any article taxable as 
jewelry. Under the 1939 code this provision did not apply in the 
case of radios and auto parts and accessories and, therefore, the treat- 



EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 41 

ment provided by the regulations did not appear to be in conflict with 
the 1939 code. 

While no change is suggested with respect to practices followed by 
the Service with respect to clock combinations, it is suggested that 
the code be amended to make it clear that where clocks are combined 
with other articles subject to a manufacturers' excise tax, the manu- 
facturers' tax is to apply to the entire combination. 

B. Technical problems in the manufacturers' taxes 

A number of relatively miaor technical points have been raised with 
respect to the refund and exemption provisions in the case of various 
manufacturers' excise taxes. For the most part these represent errors 
or ambiguities in recently enacted provisions. They are discussed 
briefly below. 

1 . Sale of certain parts or components as repair or replacement parts. — ■ 
Public Law 367, approved August 11, 1955, made certain amendments 
to section 4220 (providing an exemption for sales or resales to manu- 
facturers for further manufacture) which some believe had the effect 
of exempting from tax certain parts or components used, or sold, as 
repair or replacement parts. Specifically, this act amended section 
4220 to provide an exemption from manufacturers' excise tax for 
automobile parts or accessories, refrigerator components, radio or 
television components or camera lenses sold for use, or resale, in the 
manufacture of, or as a component part of, any article. 

It is thought by some that Public Law 367 had the effect of exempt- 
ing from, tax parts or accessories sold as repair or replacement parts 
(including parts used by a manufacturer in a repair service for a cus- 
tomer) since these parts in a sense at least are "incorporated in" other 
articles. This line of argument would completely free auto, radio, 
television, and refrigerator parts and camera lenses from tax. That 
this was not the intention of Congress is clearly indicated by the fol- 
lowing sentence from the House and Senate reports on Public Law 367: 

The adoption of a single rule exempting parts, accessories, or components from 
tax, except where they are sold for repair or replacement use, will provide greater 
equity and simplify administration and compliance. [Italics supplied.] 

It is suggested that section 4220 should be amended to make the 
congressional intent clear in the statute. 

2. Use by manufacturer of certain parts or components. — Public Law 
^67 also amended section 4218 to provide that no tax is to be due with 
respect to the use of one of the parts or accessories specified above, 
which the manufacturer himself uses in the manufacture of any other 
article. Here as in the case of the sale the question arises as to whether 
the tax applies to parts or accessories used in a manufacturer's plant 
operations as repair or replacement parts. 

It appears inconsistent to exempt these parts or components from 
tax where the manufacturer uses them himself as repair or replace- 
ment parts yet tax them if someone else uses them for such a purpose. 
It appears undesirable, for example, to exempt auto parts from tax 
where they are used by the manufacturer to repair trucks used in his 
own business or to exempt radio tubes used as replacements in radio 
or television sets which are damaged while still in the manufacturers' 
hands. 

It is suggested that section 4218 be amended to make it clear 
that with respect to automobile parts and accessories, radio and tele- 



42 EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 

vision components, refrigerator components and camera lenses, a tax 
is still to be imposed where such parts are used by the manufacturer 
as repair or replacement parts. 

3. Definition oj refrigerator components. — Section 4111 of the 1954 
code imposes a manufactm-ers' excise tax on "refrigerator compo- 
nents." As defined in section 4112, the term component means 
certain specified parts "except when sold as component parts of 
complete refrigerators, refrigerating or cooling apparatus, or quick 
freeze units (hereinafter referred to as 'refrigerating equipment')." 

Public Law 367, enacted on August 11, 1955, makes this exception 
no longer necessary and, in fact, makes its deletion desirable in order 
to avoid confusion as to the application of this tax. Public Law 367 
exempts from manufacturers' excise tax refrigerator components (as 
well as auto parts and accessories, radio and television components, 
and camera lenses) which are used as material m or as component 
parts of any article whether or not taxable. Thus, Public Law 367 
achieves on a broader basis the result obtained by the exception in 
section 4221 and makes the exception in 4221 no longer necessar}^ 

C. Documentary stamp taxes 

1. Statute of limitations for stamp taxes. — At the present time there 
are certain differences in the stamp taxes in the time from which the 
3-year statute of Umitation begins to run in the case of assessments 
and in the case of claims for credit or refund. Still different treatment 
is also provided for the redemption of stamps. 

Section 6501 provides that if a tax is payable by stamp, the statute 
runs within 3 years "after such tax became due. * * *" Section 
6511 (a), on the other hand, provides that a claim for a credit or 
refund of an overpayment of a tax required to be paid by stamp is 
to be filed within 3 years "from the time the tax was paid.'' 

There appears to be no reason for the use of two different rules in 
the case of assessments and claims for refund or credit. Moreover 
commencing the period in the case of assessments with the due date 
of the tax appears to be overgenerous. The nonpayment of a stamp 
tax appears to be approximately the equivalent of not filing a return, 
and where no return has been filed, the statute does not commence 
running in the case of these taxes. To remove this advantage for 
stamp taxes and to equate the statute of limitations in the case of 
claims and assessments, it is suggested that section 6501 be amended 
to provide that the period of limitations should commence running 
in the case of assessments from the time the stamp tax is paid rather 
than from the time the tax became due. Thus, where no stamp tax 
is paid the statute will remain open indefinitely; where a tax is paid, 
even though inadequate, the period of limitations will run from that 
date. 

Section 6805 provides that the Secretary or his delegate may redeem 
stamps (1) which have been spoiled, destroj^ed, or rendered useless 
or unfit for the purpose intended, or (2) for which the owner may have 
no use, or (3) which through mistake may have been improperly or 
unnecessarily used, or (4) where the rates or duties have in any 
manner been -wTongfully collected. A claim for the redemption of 
stamps under this section must be presented within 3 years after the 
purchase of the stamps from the Government. 

This period of limitations in section 6805 with respect to the 
redemption of stamps, to the extent it relates to used stamps, appears 



EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 43 

to be in conflict with the period of hmitations provided by section 
6511 for claims for credits or refunds of stamp taxes. Section 6805, 
as noted above, provides that the period is to begin running with 
the purchase of the stamps, while section 6511 provides it is to com- 
mence running as of the date the tax is paid or the stamps are affixed. 
To remove this conflict it is suggested that section 6805 (a) be amended 
by striking out the third and fourth categories for which redemption 
can be made, i. e., those where the stamp has been improperly or 
unnecessarily used, and where the rates or duties have been wrongfully 
collected. It is also suggested that subsection (c), which provides the 
redemption period of 3 years from date of purchase, be amended to 
make it applicable only to unused stamps. 

2. State and local government tax liability in the case of real-estate 
conveyances. — Section 4361 imposes a documentary stamp tax on 
certain conveyances of real estate. Although there are some exemp- 
tions from this tax, no exemption is provided in the case of the con- 
veyance of real estate by, or to, a State or local governmental unit. 
Section 4383 of the code imposes liability for the stamp tax upon 
both the person who makes, signs, or issues the document and upon 
the one for whose benefit the document is made, signed, or issued. 
As a result, if one party to a taxable transaction is exempt, the tax 
is still collected from the other or nonexempt party. Internal Revenue 
Ruling M. T. 39 (C. B. 1950-1, 141) provides that a State or local 
government is immune from the documentary stamp tax on the 
conveyance of real estate when it is acting in its "governmental" 
capacity in transferring, or acquiring, real property from a private 
purchaser. However, the nonexempt party is held subject to the 
documentary stamp tax in the case of both transfers of real property 
to, and acquisitions of such property from, State or local governmental 
units. 

It is suggested that the treatment presently provided for State 
and local governmental units be added to the statute but that no 
distinction be made between transfers or acquisitions for govern- 
mental as distinct from proprietary functions. The statute would 
then provide that in no case would a tax be collected from the State, 
thus affording the same treatment for States and local governments 
as the law now provides for the Federal Government. 

D. Club-dues tax 

1 . Power of attorney required in the case of claims for credit or refund. — 
Section 6415 (a) provides that a credit or refund for overpayments 
of the club-dues tax is to be allowed to the person who collected 
the tax if such person can show that he has repaid the amount of the 
tax to the person from whom he collected it or if he has obtained the 
consent of such person to the allowance of the credit or refund. 
Although this is almost identical to 2 of the 3 conditions imposed in 
the case of overpayments of manufacturers' excise taxes, the regula- 
tions in this case have provided a much stricter procedure which must 
be foUowed before repayment of any tax. The regulations provide 
that where a club as agent for its members seeks a refund of tax 
collected by it, since the members and not the club are the actual tax- 
payers, the claim must be accompanied by the following: 

(a) An alphabetical list of the names of the taxpayers, showing 

the amount claimed for each and the dates on which the amounts 

were paid; 



44 EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 

(6) The power of attorney executed by each pereon for whom 
a claim is filed; 

(c) A copy of the constitution, bylaws, or other rules and 
regulations of the organization, together with amendments. 

Complaints have been received that requiring the club to obtain a 
power of attorney for each person for whom a refund is being claimed 
is unduly burdensome. Although the statutory provision governing 
refunds of overpayments in the case of manufacturers' excise taxes is 
quite similar, the regulations require no such power of attorney in 
that case. 

After a discussion of this problem with representatives of the 
Internal Revenue Service, it was agreed an appropriate revision of the 
regulations would be made to provide that an indication of consent, 
rather than the execution of a power of attorney will be a sufficient 
basis on which to allow a credit or refund. The procedure to be fol- 
lowed in such a case will be substantially the same as is presently 
followed in the case of the manufacturers' excise taxes. 

2. Refund of tax in case of refund of initiation fee. — Section 6415 (d) 
provides for a refund of the club-dues tax where the payment on which 
it was based has been refunded. In the past the Internal Revenue 
Service has interpreted this as providing for refunds in the case of 
initiation fees only in the event that a membership paj^ment has been 
rejected. However, this subsection clearly requu-es a refunding of 
the tax where an initiation fee is repaid to a member, irrespective of 
how long ago the initial payment with respect to the initiation fee 
had been made. This interpretation has now been adopted by the 
Service. 

This appears to be the proper result since the tax with respect to 
initiation fees is in effect a tax with respect to what might be considered 
the assets or working capital of the club. As these funds are reduced 
b}^ repayments to members, it appears only proper that the tax also be 
reduced. To do otherwise would result in the payment of varying 
taxes with respect to two clubs maintaining the same amount of 
working capital, where membership in one of the clubs turns over 
more rapidly than in the case of the other. 

E. Cabaret tax 

Section 6416 (a) provides for credits or refunds of overpayments of 
tax imposed with respect to the cabaret tax and the tax on the trans- 
portation of oil by pipelines, as well as in the case of retail and manu- 
facturers' excise taxes. However, 1 of 3 conditions set forth in the 
subsection must be met before a refund or credit is allowed. These 
are: (1) A showing that the burden of the tax was not shifted forward 
to the consumer of the article or service; (2) repayment of the tax to 
the purchaser in the case of retail excises, or ultimate purchaser in 
the case of manufacturers' excises (or with an agreement to repay in 
the case of certain types of claims) ; or (3) the filing with the Treasury 
of the written consent of the purchaser or ultimate purchaser to the 
allowance of the credit or refund. 

The first of these three conditions clearly applies in the case of the 
cabaret tax and the tax on the transportation of oil by pipeline. The 
Service has held, however, that the second and third conditions do 
not apply m the case of these taxes because the references in the 
second paragraph are only to retailers' or manufacturers' taxes. 



I 



EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 45 

Under the suggestion in I above the statute would be revised to 
make it clear that a refund of the cabaret tax and the tax on the 
transportation of oil by pipeline will be made where the amount of the 
tax has been repaid to the consumer of the service, or where the con- 
sumer of the service gives permission to the performer of the service 
to the allowance of the credit or refund. For purposes of 'aniformity, 
and also on the basis of equity, it would appear proper that all three 
procedures for making refunds be made available in the case of the 
cabaret tax and the tax on the transportation of oil by pipeline. 

III. PLOOR STOCK REFUNDS 

The 1954 Internal Kevenue Code now contains provisions for 
refunds on taxpaid floor stocks for (1) alcoholic beverages, (2) cig- 
arettes, (3) gasoline, (4) automobiles and trucks, and (5) automobile 
parts and accessories which are scheduled for automatic rate reduc- 
tions as of April 1, 1956. There is also a provision in the code for 
refund of the tax paid on imported sugar or imported articles com- 
posed in chief value of sugar which are held by the importer on June 
30, 1957; at which time the tax on the sale or importation of sugar is 
scheduled to terminate. The methods for paying refunds vary among 
the different taxes with unnecessary complications in the law. Aside 
from this, experience with the floor stocks refunds under the Excise 
Tax Reduction Act of 1954 pointed out the need for revision in some 
of the provisions now in the code. Also, the provision for refunds in 
1956 on floor stocks of automobile parts and accessories was placed 
in the 1954 code as a result of a transposition of subsections during 
the revision process. 

A. Provisions in present law 

under present law for filing the claim for refund. The alcoholic 
beverage and cigarette provisions provide that the person holding 
the taxed items is to file the claim. Similarly, the sugar provisions 
provide for filing by the importer who paid the tax. 

The gasoline refund provision uses a second pattern. Here it is 
provided that the dealer is to file a claim for refund with the producer 
or importer who paid the tax, and the producer or importer, after 
reimbursing the dealer, is to file a claim for credit or refund with the 
Government. 

The third pattern, used in the case of motor vehicles and auto- 
mobile parts, is a dual claim system. First, the manufacturer or 
producer may file a claim with respect to tax-paid floor stocks of his 
dealers. After having been allowed the claim by the Government, the 
manufacturer is to remit the refund to the dealer to the extent that the 
tax represented by the refund was included in the price paid by the 
dealer. Alternatively, the dealer may file claim directly with the 
Government, if the manufacturer or producer waives the right to 
claim the refund. 

2. Time for filing claims. — The various refund provisions also differ 
considerably in the time allowed for filing refunds. In the case of 
alcoholic beverages, claims for refunds must be filed within 1 month 
from the date of the tax reduction or within 30 days from the promul- 
gation of the regulations on refunds. For cigarettes, claims must be 
filed within 3 months from the date of the tax reduction. For motor 



46 EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 

vehicles, automobile parts, and gasoline claims also must be filed 
within 3 months from the date of tax reduction. The provisions for 
refunds on floor stocks of imported sugar contain no special time 
limitation as to the period for filing claims. 

3. Other provisions. — There are also several oth.'r details in which 
the various refund provisions differ. For alcoholic beverages and 
cigarettes, it is provided that the persons requesting credits or refunds 
are to keep such information on inventories, sales, and purchases for 
periods both before and after April 1, 1956 (but not extending beyond 
1 year thereafter), as are prescribed l3y regulations. The refund pro- 
visions on motor vehicles, automobile parts, and gasoline require such 
evidence of inventories with respect to which refunds or credits are 
claimed as may be prescribed by regulations. In addition, the gaso- 
line refund provision requires establishment that a quantity of gasoline 
equal to that on which floor stocks refund or credit is claimed was sold 
on or after Aprfl 1, 1956, at a price to the ultimate consumer which 
reflected the amount of the tax reduction. A similar requirement for 
passing on the tax reduction was previously in the provisions for 
refund with respect to taxpaid floor stocks of alcoholic beverages and 
cigarettes but was eliminated in the 1954 code. 

B. Suggested revisions for floor stock refunds 

1. General revision of ijresent floor stock refunds of manufacturers' 
excises. — Under the Excise Tax Reduction Act of 1954, which pro- 
vided for refunds on electric light bulbs, refrigerators, and electric, gas, 
and oil appliances, claims for refunds were filed by dealers with the 
manufacturers or importers. The manufacturers or importers were 
required to verify these claims and then refund the amounts verified 
to the dealers. Generally speaking, this system was found to be 
satisfactory, and its further use is recommended. 

The 1954 refund system was not satisfactory with respect to the 
time factors involved. In the first place, except for electric light 
bulbs, there was no provision that dealers must file their claims with 
the manufacturers prior to the last day the manufacturers themselves 
were allowed to file claims with the Government. Consequently, the 
manufacturers either had to set up an arbitrary cutoff date for 
dealers' claims prior to their time of filing, or else be faced with the 
necessity of trying to process all the dealers' claims at the last moment. 
Moreover, manufacturers had to pay the dealers' claims prior to the 
time they filed their own consolidated claim with the Government. 
This placed another timing squeeze on the manufacturers, and in 
some cases a fiscal burden because they had to pay out money or give 
credit prior to the time that they received any benefit from the Gov- 
ernment. Another inadequacy of the 1954 procedure arose from 
failure to coordinate the manufacturers' filing date with their normal 
filing date for payment of taxes. As a consequence of this, manu- 
facturers could not claim a credit against taxes due unless they 
speeded up the filing of their regular quarterly excise returns.^ To 
meet these three problems it is suggested that certain changes be 
made in the present law. 

(a) It is suggested that dealers be required to file their claims 
with the manufacturers at some time prior to the time manufacturers 

« This applies only where three or more monthly deposits are required under the depositary receipt 

Bystem. 



EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 47 

have to file their claims. It is recommended that dealers be allowed 
a period of 2 months and 10 days after the rate reduction date for the 
filing of then- claims with the manufacturers. Manufacturers would 
then be given an additional period of at least 1 month, or possibly 
as much as 3 months for the compiling of these claims of the dealers 
and making a claim with the Government. Thus the overall period 
would vary from 3 months and 10 days to 5 months and 10 days. 

This compares with an aggregate 3-month period which exists in 
most cases under present law. The variation in the filing date for 
manufacturers is suggested in order to make the filing of these refund 
claims coincide with the quarterly filing date for excise taxes generally. 
This is explained further below. 

(b) It is recornmended that manufacturers not be required to pay 
dealers their claims prior to the time the manufacturers file their 
claims, or even prior to, or at, the time the manufacturers receive 
the benefit of the credit or refunds from the Government. Instead it 
is recommended that the manufacturers be required to state that 
within 30 days after they receive a refund (or notice of allowance 
for claim of credit) they will pass it on to the dealers. 

(c) It is recommended that the filing of claims be integrated with 
the filing of their quarterly excise tax returns. A provision for inte- 
gration of floor-stocks refunds with the quarterly return system of 
manufacturers would provide, as indicated above, that dealers would 
have a period of 2 months and 10 days to file their claims for refund 
with their manufacturers. Manufacturers would have a variable 
time lag to file their claims depending on the relationship of the reduc- 
tion date to the quarterly filing date. The filing date for manufac- 
turers would be the next date for filing quarterly returns at least 3 
months and 10 days after the rate reduction date. Thus the filing 
date for January, February, and March collections is May 10. In 
the case of a reduction effective — 

(i) On January 1, the dealers would file their claims with their 
manufacturers on March 10, and the manufacturers would file 
their claims 2 months later on May 10; 

(ii) On February 1, the dealers would file claims with their 
manufacturers on April 10, and the manufacturers would file 
their claims 1 month later on May 10; or 

(iii) On March 1, the dealers would file claims with their manu- 
facturers on May 10, and the manufacturers would file their 
claims 3 months later on August 10, the next filing date for 
quarterly returns. 
2. Price reduction requirement for gasoline. — The requirement that 
gasoline prices be reduced to reflect the refund on tax-paid floor stocks 
was inserted in the law in 1951 when the floor stocks provision was 
origmally enacted. As such, it is a carryover of a simflar provision 
that was placed in the law with respect to alcoholic beverages when 
provision for refunds on floor stocks was made by the Revenue Act 
of 1945. The 1945 provision represented a reaction to the short 
supply situations in existence at that time. Whfle undoubtedly 
desirable from a theoretical point of view, such a provision would be 
difficult to prove compliance with and also to administer. Under 
present day conditions of adequate suppHes, it would seem that 
competition generally would supply adequate safeguards for the 



48 EXCISE TAX TECHNICAL AND ADMINISTRATIVE PROBLEMS 

interest of consumers. Consequently, this provision could be repealed 
as was done in the case of alcoholic beverages and cigarettes in 1954. 

3. Automobile parts and accessories. — Congress provided for refunds 
on tax-paid floor stocks of passenger automobiles and trucks m the 
Excise Tax Reduction Act of 1954; no provision was made at that time 
for refunds on automobile parts and accessories. The refund pro- 
vision originall}^ was m section 3403 (f) of the 1939 code. It provided 
for floor stocks refunds on articles taxed under section 3404 (a) and 
(b) at the time when the taxes on such articles were reduced. Sub- 
sections (a) and (b) at that time covered trucks and passenger auto- 
mobiles. Automobile parts and accessories were taxed under sub- 
section (c). When these taxes were transferred to the 1954 code as 
section 4061, the taxes on passenger automobiles and trucks were 
placed in subsection (a) and the tax on parts was put in subsection (b). 
The floor stocks refund provision which is now section 6412 (a) con- 
tinued to use the references to taxes imposed by subsections (a) and 
(b) of the tax imposing section. In so doing, the refund section, in 
effect, covered what had previously been three subsections, (a), (b), 
and (c), (c) being the subsection in the 1939 code referring to parts 
and accessories. This technical error provided for refunds which the 
Congress did not intentionally legislate. 

Aside from the fact that the refund for automobile parts and acces- 
sories is imintentional, it appears undesirable from the point of view 
of administration and compliance. Unlike the taxes on alcoholic 
beverages, cigarettes, and gasoline, the automotive taxes are ad 
valorem rather than specific taxes. Consequently, when a dealer 
wishes to claim a credit or refund, he must determine, or have deter- 
mined for him by the manufacturer, the amount of the tax that was 
paid on the sales price of the articles. This is no great problem in the 
case of large items, like automobiles and trucks, where each unit has a 
serial number. In the case of parts and accessories, however, the 
problem in many cases would seem almost impossible to solve except 
on an estimated basis. The tax covers literally hundreds of items, 
many of which are very small. Quite often the dealer has bought such 
parts at different times from wholesalers and has no way of identifying 
at what time the various articles were bought, or even the manu- 
facturer. Aluch of the burden of computation would fall upon the 
manufacturers who would probably end up by making estimates, and 
in some cases by simply refusing to try to determine the information 
requested. Consequently, it is suggested that this provision be deleted. 

4. Sugar. — The refund provision for taxpaid imported sugar or 
imported products composed in chief value of manufactured sugar 
when held by the importer and intended for sale contains no specified 
time limit as to when claims for refund should be filed. This require- 
ment would be handled by the regulations. If the filing of flooi 
stocks refunds for other taxes is to be based on statutory time limits, 
there seems to be no reason why this refund should not be so regulated. 

5. Alcoholic beverages and cigarettes. — The refund provisions for 
alcoholic beverages and cigarettes require claimants to keep such rec- 
ords of inventories, sales, and purchases as may be prescribed by the 
Secretary or his delegate for a time both before and after the tax 
reduction date (but not extending beyond 1 year thereafter). In the 
case of cigarettes, this provision was inserted in 1951 to make it com- 



EXCISE TAX TBCEDSTCAL AND ADMINISTRATIVE PROBLEMS 49 

parable with the requirement existing since 1945 in the case of alcoholic 
beverages. The alcohohc beverage rrovision was first inserted in 
1945 in conjunction with the requirement that there be proof of price 
reductions to reflect the proposed refunds (a price reduction provision 
now exists only in connection with the refund provision for gasoline). 
But the price reduction provision for alcoholic beverages and cigarettes 
was eliminated at the time of the enactment of the 1954 code. There- 
fore, there appears to be no need for the retention of the recordkeeping 
provisions with respect to sales and purchases; the general requirement 
as to inventory data in the refund provisions for manufacturers' 
excises should be sufficient. 



PART 3: ADJUSTMENT OF PRICE ON SALES TO SELLING 

SUBSIDIARY 

Section 4216 (b) of the Internal Revenue Code of 1954 provides 
that if an article is — 

(1) sold at retail (i. e., to a consumer), 

(2) sold on consignment, or 

(3) sold (otherwise than through an arm's length transaction) 
at less than fair market price, 

tax is to be computed on the price for which the articles are sold by 
the manufacturers in the ordinary course of trade as determined by 
the Secretary or his delegate. 

The Internal Revenue Service has taken the position that a sale to 
a selling subsidiar^^ is presumed to be not at arm's length. It is recom- 
mended that the law be amended to include this presumption. 

50